REASONS FOR JUDGMENT
Sommerfeldt J.
I. INTRODUCTION
[1] These Reasons relate to:
appeals (the “Boles Appeals”) instituted by Pamela S. Boles in respect of reassessments (the “Boles Reassessments”) made by the Minister of National Revenue (the “Minister”), as represented by the Canada Revenue Agency (the “CRA”), for the 2006, 2007, 2008, 2009 and 2010 taxation years (the “2006‑2010 taxation years”), and
appeals (the “Schroeder Appeals”) instituted by F. Andrew Schroeder in respect of reassessments (the “Schroeder Reassessments”) made by the Minister, as represented by the CRA, for the 2004, 2005, 2006, 2007, 2008, 2009 and 2010 taxation years (the “2004‑2010 taxation years”).
[2] In the context of these appeals, the Appellants incurred losses during the above taxation years in respect of various dog‑related activities (the “Dog Activities”), and they incurred losses during the 2006‑2010 taxation years in respect of two residential real estate rental properties (the “Rental Properties”). Again, in the context of these appeals, the Appellants deducted the dog‑related losses in computing their respective incomes for 2004‑2010, and Ms. Boles deducted the rental losses in computing her income for 2006‑2010. The Minister disallowed the losses deducted by both the Appellants in respect of the Dog Activities and the rental losses deducted by Ms. Boles, on the basis that:
the Dog Activities were a hobby, and thus, were not a source of income, and
the claimed rental‑property expenses were not incurred, or if incurred, were not incurred for the purpose of gaining or producing income from a business or property, and/or were personal in nature.
[3] On February 3, 2020, at the commencement of the trial, counsel for the Crown read to the Court a statement indicating that the Crown acknowledged that the “amount claimed as expenses by the appellants for each year in issue respecting the dog activities was spent [and] the amount claimed as rental expenses for each year in issue was spent[,] and[,] as per paragraph 23 of the reply filed in the Boles appeal[,] those claimed amounts are not deductable [sic] pursuant to paragraphs 18(1)(a) and (h) of the Income Tax Act.”
[4] However, on November 9, 2023, just before counsel for the Appellants reminded the Court of the above statement by counsel for the Crown, counsel for the Crown made two statements that now cause me to wonder about the Crown’s position. First, counsel for the Crown stated, “So those are the issues before the court. Were the expenses incurred.” Second, counsel also stated, “So I think I just want to know if the expenses were incurred.” Thus, I am not sure whether the Crown is resiling from the statement read to the Court on February 3, 2020.
[5] For the first six days of the trial of these Appeals, the trial judge was Justice Campbell. The trial was interrupted by the Covid‑19 pandemic. Justice Campbell retired during that hiatus in the trial. I was subsequently assigned to hear the balance of the trial.
II. BACKGROUND
[6] During the above taxation years, the Appellants, who were busy lawyers, were married to one another. Ms. Boles carried on her legal practice, through a law corporation, as a sole practitioner. From 1986 to 2007, Mr. Schroeder was a partner in Schroeder and Company. From 2007 or 2008 to 2010, Mr. Schroeder practiced law as a partner in a two‑person partnership, Schroeder Speier Law Partnership, which dissolved in 2010.
[7] In the late 1990s, the Appellants embarked on the Dog Activities. They attended dog shows; decided to raise Rottweilers; carefully researched, selected and acquired a male and female Rottweiler as their foundational breeding pair; began to breed, raise, show, lease and sell Rottweilers; and collected, stored and sold semen. Eventually, they broadened their scope, by acquiring a pair of French bulldogs and expanding from there. In addition, Ms. Boles embarked on a path to become qualified as a judge for dog shows. In the Dog Activities, the Appellants achieved recognition and dog‑show success, but also faced challenging setbacks.
[8] For each year from 1999 to 2016, the expenses incurred by the Appellants in respect of the Dog Activities significantly exceeded their revenue, such that the Appellants incurred, reported and deducted substantial losses from the Dog Activities for each of those years. A table summarizing those losses, which was marked as Exhibit R‑1 at the trial, is appended to these Reasons as Schedule A. As noted above, the Minister disallowed the losses on the basis that the Dog Activities were a hobby.
[9] In 2001, the Appellants purchased a four‑bedroom house on a large lot, located at 434 Panorama Crescent, Okanagan Falls, British Columbia (I will refer to this property as “434 Panorama”). They made minor renovations, and then advertised 434 Panorama for short‑term rentals. In 2005, the adjacent property, located at 436 Panorama Crescent (to which I will refer as “436 Panorama”) was offered for sale by its then owner. As it was better positioned and configured, with a better view of Skaha Lake than the view at 434 Panorama, the Appellants decided to purchase it, and advertise it for short‑term rentals, as well.
[10] After acquiring 436 Panorama, the Appellants discovered that it needed significant renovations. For several reasons, including a trades and labour shortage in the Okanagan Valley, the renovations took much longer, and cost more, than originally anticipated.
[11] Based on the research that they had conducted before deciding to purchase 434 Panorama, the Appellants understood that, because of the summer and winter recreational appeal of the Okanagan Valley, short‑term rental properties could be more profitable than long‑term rental properties. However, due to a variety of factors, including a change in the Canada‑US currency exchange rate and summer wild fires, the short‑term rental market was not as strong as had been anticipated.
[12] For each year from 2006 through 2010, the expenses in respect of 434 Panorama and 436 Panorama (together, defined above as the “Rental Properties”) exceeded the rental revenue, with the result that losses were incurred during each of those years. A table summarizing the rental losses deducted by Ms. Boles, which was set out in subparagraph 13.hh) of the Reply in the Boles Appeals (the “Boles Reply”), is appended to these Reasons as Schedule B.
[13] The Appellants were co‑owners of the Rental Properties, so, in the context of these Appeals, they shared the rental losses 50%/50% in 2006, 2007 and 2010. Ms. Boles claimed 100% of the rental losses in 2008 and 2009. Only Ms. Boles was reassessed by the Minister to disallow the deduction of the rental losses. The Minister did not reassess Mr. Schroeder in this regard.
III. ISSUES
[14] The issues in these Appeals are:
Was the Minister precluded by subsection 152(4) of the Income Tax Act (the “ITA”)[13] from reassessing:
Ms. Boles in respect of the 2006 and 2007 taxation years, and
Mr. Schroeder in respect of the 2004 through 2008 taxation years?
Were the Dog Activities a source of income for Ms. Boles in the 2006 through 2010 taxation years and for Mr. Schroeder in the 2004 through 2010 taxation years, and, if so, were the claimed expenses in respect of those activities deductible?
Were the claimed expenses in respect of the Rental Properties deductible by Ms. Boles?
Did the Minister properly assess a repeated‑failure‑to‑file penalty in respect of the filing of:
Ms. Boles’ 2008 income tax return, and
Mr. Schroeder’s 2004 income tax return?
Did the Minister properly assess a late‑filing penalty in respect of the filing of Ms. Boles’ 2009 income tax return?
IV. LEGAL AUTHORITIES
A. Statutory Provisions — Limitation on Reassessment
[15] Subsection 152(3.1) of the ITA defines the “normal reassessment period” for an individual as three years from the date of sending of the notice of assessment. Subparagraph 152(4)(a)(i) of the ITA provides that the Minister may reassess a taxpayer outside the normal reassessment period only if the taxpayer or person filing the return “made a misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information” under the ITA. Subparagraph 152(4.01)(a)(i) of the ITA provides that a reassessment to which paragraph 152(4)(a) applies “may be made after the taxpayer’s normal reassessment period in respect of the year to the extent that, but only to the extent that, it can reasonably be regarded as relating to … any misrepresentation made by the taxpayer or person who filed the taxpayer’s return of income for the year that is attributable to neglect, carelessness or wilful default or any fraud committed by the taxpayer or that person in filing the return”.
[16] Subsection 3(a) of the ITA provides that a taxpayer’s income for the year includes their income from a “source inside or outside Canada, including … income from … business and property”. Section 9 of the ITA provides the basic rule for computing a taxpayer’s income or loss from a business or property. Paragraph 18(1)(a) of the ITA provides that, taxpayers can only claim deductions from a business or property for outlays or expenses “made or incurred by the taxpayer for the purpose of gaining or producing income from a business or property”.
[17] Paragraph 18(1)(h) of the ITA provides that “personal or living expenses of a taxpayer, other than travel expenses incurred by the taxpayer while away from home in the course of carrying on the taxpayer’s business” are not deductible. Section 67 of the ITA provides a general limitation on the deductibility of unreasonable expenses. Subsection 67.1 of the ITA provides that taxpayers can only claim the lesser of 50% of the amount paid for “human consumption of food or beverages or the enjoyment of entertainment” and an amount that would be reasonable in the circumstances
[18] Subparagraph 150(1)(d)(ii) of the ITA provides that individuals “who carried on a business in the year, unless the expenditures made in the course of carrying on the business were primarily the cost or capital cost of tax shelter investments” are required to file a return of income for a taxation year by the following June 15th. Subsection 162(1) of the ITA states, “Every person who fails to file a return of income for a taxation year as and when required by subsection 150(1) is liable to a penalty”. Subsection 162(2) of the ITA states:
(2) Every person
(a) who fails to file a return of income for a taxation year as and when required by subsection 150(1),
(b) to whom a demand for a return for the year has been sent under subsection 150(2), and
(c) by whom, before the time of failure, a penalty was payable under this subsection or subsection 162(1) in respect of a return of income for any of the 3 preceding taxation years
is liable to a penalty equal to the total of …
B. Jurisprudence — Source of Income
[19] In Stewart, the Supreme Court of Canada clarified the manner in which a court is to determine whether a particular activity constitutes a source of income (which may be a business or property source). In recent years, Stewart’s guidance has been reiterated by the Federal Court of Appeal in Paletta Estate and Brown. In addition, over the past year or two, in several cases the Tax Court of Canada has had occasion to consider the test for determining whether a taxpayer has a source of income. This body of jurisprudence, as applicable to these Appeals, is summarized below.
Stewart v. The Queen
[20] A concise summary of the Supreme Court’s guidance is set out in one of the introductory paragraphs to the reasons of Justices Iacobucci and Bastarache, as follows:
It is undisputed that the concept of a “source of income” is fundamental to the Canadian tax system; however, any test which assesses the existence of a source must be firmly based on the words and scheme of the Act. As such, in order to determine whether a particular activity constitutes a source of income, the taxpayer must show that he or she intends to carry on that activity in pursuit of profit and support that intention with evidence. The purpose of this test is to distinguish between commercial and personal activities, and where there is no personal or hobby element to a venture undertaken with a view to a profit, the activity is commercial, and the taxpayer’s pursuit of profit is established. However, where there is a suspicion that the taxpayer’s activity is a hobby or personal endeavour rather than a business, the taxpayer’s so‑called reasonable expectation of profit is a factor, among others, which can be examined to ascertain whether the taxpayer has a commercial intent.
[21] More specifically, in Stewart, the Supreme Court of Canada reasoned that the “reasonable expectation of profit” test, which traced its roots back to Moldowan, and beyond, “should not be accepted as the test to determine whether a taxpayer’s activities constitute a source of income.” Rather, the Supreme Court stated that the source issue should be resolved by the application of a two‑stage approach:
… [T]he following two‑stage approach with respect to the source question can be employed:
(i) Is the activity of the taxpayer undertaken in pursuit of profit, or is it a personal endeavour?
(ii) If it is not a personal endeavour, is the source of the income a business or property?...
Equating “source of income” with an activity undertaken “in pursuit of profit” accords with the traditional common law definition of “business”, i.e., “anything which occupies the time and attention and labour of a man for the purpose of profit”…. [I]t is logical to conclude that an activity undertaken in pursuit of profit, regardless of the level of taxpayer activity, will be either a business or property source of income. [Citations omitted.]
[22] The application of the above approach is more straightforward where a particular activity (such as a law practice or a restaurant) has no personal element. However, “where the nature of a taxpayer’s venture contains elements which suggest that it could be considered a hobby or other personal pursuit,” the application of the two-stage approach becomes more challenging. In this regard, the Supreme Court stated:
We emphasize that this “pursuit of profit” source test will only require analysis in situations where there is some personal or hobby element to the activity in question.
Nevertheless, if the taxpayer whose venture might be suggestive of a hobby or other personal pursuit succeeds in proving that “the venture [was] undertaken in a sufficiently commercial manner, the venture will be considered a source of income for the purposes of the Act.”
[23] The exercise of proving the commerciality of a particular activity has both a subjective element and an objective element, as explained by the Supreme Court in these terms:
It should also be noted that the source of income assessment is not a purely subjective inquiry. Although in order for an activity to be classified as commercial in nature, the taxpayer must have the subjective intention to profit, in addition, as stated in Moldowan, this determination should be made by looking at a variety of objective factors. Thus, in expanded form, the first stage of the above test can be restated as follows: “Does the taxpayer intend to carry on an activity for profit and is there evidence to support that intention?” This requires the taxpayer to establish that his or her predominant intention is to make a profit from the activity and that the activity has been carried out in accordance with objective standards of businesslike behaviour.
[24] In the Moldowan case, while discussing the method for determining whether a taxpayer has a reasonable expectation of profit, Justice Dickson (as he then was) listed four objective factors:
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. The list is not intended to be exhaustive. The factors will differ with the nature and extent of the undertaking….
[25] After reviewing the above comments made by Justice Dickson in Moldowan, Justices Iacobucci and Bastarache, in Stewart, emphasized that, “although the reasonable expectation of profit is a factor to be considered at this stage, it is not the only factor, nor is it conclusive.” They then cautioned:
The overall assessment to be made is whether or not the taxpayer is carrying on the activity in a commercial manner. However, this assessment should not be used to second-guess the business judgment of the taxpayer. It is the commercial nature of the taxpayer’s activity which must be evaluated, not his or her business acumen.
[26] In concluding its discussion of the recommended approach for determining whether an activity is a source of income, the Supreme Court stated:
In summary, the issue of whether or not a taxpayer has a source of income is to be determined by looking at the commerciality of the activity in question. Where the activity contains no personal element and is clearly commercial, no further inquiry is necessary. Where the activity could be classified as a personal pursuit, then it must be determined whether or not the activity is being carried on in a sufficiently commercial manner to constitute a source of income.
[27] In Stewart, the taxpayer owned four rental condominium units, which were rented to arm’s‑length parties. There was no evidence that the taxpayer intended to make use of any of the properties for his personal benefit. As there was no element of personal use or benefit to the taxpayer, the Supreme Court held that the property‑rental activity was clearly a commercial activity, such that it was a source of income.
[28] The Supreme Court then went on to consider the hypothetical situation, if the taxpayer were to have had made use of one of the properties for his personal benefit:
Even if the appellant had made use of one or more of the properties for his personal benefit, the Minister would not be entitled to conclude that no business existed without further analysis. A taxpayer in such circumstances would have the opportunity to establish that his or her predominant intention was to make a profit from the activity and that the activity was carried out in accordance with objective standards of businesslike behaviour. Whether a reasonable expectation of profit existed may be a factor that is taken into consideration in that analysis.
Brown v. The King
[29] In Brown, Justice Webb noted that the Supreme Court, in Stewart, had stated that, where an “activity could be classified as a personal pursuit, … it must be determined whether or not the activity is being carried on in a sufficiently commercial manner to constitute a source of income.” Justice Webb then stated, “To determine if the further analysis with respect to the commerciality of the activity is required, the focus is on the activity itself and whether there is any personal or hobby element to the activity.”
Savage v. The Queen
[30] Somewhat similar to the facts of these Appeals, the facts of the Savage case pertained to dog‑related activities. Mr. and Mrs. Savage carried on a kennel operation, whose activities extended to breeding, training, boarding and dog sitting.
[31] From 1999 to 2016, Mr. and Mrs. Savage’s dog‑related activities incurred net losses, ranging from a loss of $29,384 in 2008 to a loss of $1,600 (or possibly $3,200) in 2016. During each year from 1999 to 2012, the amount of the gross income from those activities for a particular year was substantially less than the amount of the loss for that year. No evidence was given as to the gross income for 2013 to 2016. The respective amounts of the gross income ranged from $4,800 in 2006 and 2007 to zero in 2009. The net loss in 2009 was $28,974 (which was the second largest loss). In 2008, when the largest loss ($29,384) was incurred, the gross income was $1,050.
[32] Justice Campbell Miller reviewed the Stewart decision, and then stated:
13. So, if I find there is a personal element then I turn to the badges of trade or indicia of commerciality to determine if it was carried on in a sufficiently commercial manner to constitute a business. It is at this stage [that] it remains open to consider the reasonable expectation of profit test as one factor in such an evaluation. The [Supreme] court [in Stewart] outlined the following factors[,] indicating this is not exhaustive:
1) Profit and loss of past years;
2) Training;
3) Intended course of action;
4) Capability to show a profit.
14. I would add to this a review of all the trappings that tend to go hand‑in‑hand with a business venture, that is, the commercial nature of the activity.
[33] Justice Miller found that there was a personal element to the Savages’ endeavor, which necessitated an examination of “the pursuit of profit test to determine if the venture was undertaken in a sufficiently commercial manner to be considered a source of income.” After conducting that examination, he concluded that there was no business.
Tweneboah v. The King
[34] In Tweneboah, Justice Spiro considered a situation in which a certified quality engineer, who worked full-time at various suppliers to the auto industry, in his spare time undertook, with his family, painting and cleaning activities, and an activity to build a web‑commerce website. These activities resulted in losses, whose deduction was denied.
[35] In determining whether the activities had been conducted in pursuit of profit, Justice Spiro posed several questions, as follows:
The absence of answers to any of the following questions strongly suggests that the Appellant did not conduct his activities in pursuit of profit:
The revenue side
· How did he decide to charge for his goods or services? Did he charge by time, by task, or by some other method?
· How did he assess whether his charging method was appropriate?
The expense side
· How did he track how much he spent during the year? Did he categorize and organize his expenses? If so, how?
· How did he assess whether he was spending too much or not enough on each category of expense?
How did the Appellant intend to turn a profit?
· What financial problem(s) did he experience and why?
· How did he determine the source(s) of each problem?
· What strategies did he consider to deal with each problem?
· Which of those strategies did he adopt? Why?
· Did his chosen strategy work? If not, why not? What did he do next?
[36] While not all of the above questions are pertinent to Ms. Boles’ and Mr. Schroeder’s activities, there are a few questions, particularly in the third category, which may have some applicability to their Appeals.
Preston v. The King
[37] In her summary of the legal framework applicable to the case before her, Justice Wong reiterated Stewart’s two‑stage approach to be applied to determine whether a taxpayer’s activities constitute a source of income. After setting out the first stage (i.e., “Is the activity … undertaken in pursuit of profit, or is it a personal endeavour?), she then paraphrased, in the following manner, the Supreme Court’s expanded form of that stage of the test:
In other words, does the taxpayer intend to carry on the activity for profit and is there objective evidence to support that subjective intention? The taxpayer must show that their predominant intention is to make a profit from the activity and that the activity has been conducted so as to be consistent with objective standards of businesslike behaviour. [Footnotes omitted.]
[38] Justice Wong then went on to summarize other principles from Stewart as follows:
18. Where the activity: (a) appears to be clearly commercial, (b) contains no personal or hobby element, and (c) the evidence is consistent with the view that the activity is conducted for profit, then a source of income exists for the purposes of the Act. However, where the activity could be considered a personal pursuit, then one must ask if the activity is being carried on in a sufficiently commercial manner so as to be a source of income.
19. When determining whether a taxpayer is carrying on the activity in a sufficiently commercial manner, the non‑exhaustive list of objective factors include: (1) profit and loss experience in past years, (2) the taxpayer’s training, (3) the taxpayer’s intended course of action, and (4) the capability of the activity to show a profit. The factors will vary depending on the nature and extent of the activity. This determination is not an evaluation of the taxpayer’s business acumen but, rather, the commercial nature of the activity in question. [Footnotes omitted.]
V. REASSESSMENTS AFTER NORMAL REASSESSMENT PERIODS
A. Principles
[39] Concerning the limitation period beyond which the Minister may be precluded from reassessing a taxpayer, subparagraph 152(4)(a)(i) of the ITA states:
152(4) The Minister may at any time make an assessment, reassessment or additional assessment of tax for a taxation year, interest or penalties, if any, payable under this Part by a taxpayer or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the year, except that an assessment, reassessment or additional assessment may be made after the taxpayer’s normal reassessment period in respect of the year only if
(a) the taxpayer or person filing the return
(i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act….
[40] Subparagraph 152(4.01)(a)(i) of the ITA limits the extent to which a reassessment may be made after the normal reassessment period. That provision states:
152(4.01) Notwithstanding subsections (4) and (5), an assessment, reassessment or additional assessment to which any of paragraphs (4)(a) to (b.1) or (b.3) to (c) applies in respect of a taxpayer for a taxation year may be made after the taxpayer’s normal reassessment period in respect of the year to the extent that, but only to the extent that, it can reasonably be regarded as relating to,
(a) where paragraph 152(4)(a) applies to the assessment, reassessment or additional assessment,
(i) any misrepresentation made by the taxpayer or a person who filed the taxpayer’s return of income for the year that is attributable to neglect, carelessness or wilful default or any fraud committed by the taxpayer or that person in filing the return or supplying any information under this Act….
[41] The Boles Reassessments were issued on April 8, 2013, which was after the normal reassessment period (as defined in subsection 152(3.1) of the ITA) in respect of each of Ms. Boles’ 2006 and 2007 taxation years. The Schroeder Reassessments were also issued on April 8, 2013, which was after the normal reassessment period in respect of each of Mr. Schroeder’s 2004 through 2008 taxation years.
[42] Subparagraph 152(4)(a)(i) of the ITA provides that the Minister may make a reassessment of tax, interest or penalties for a taxation year after a taxpayer’s normal reassessment period in respect of the year, if the taxpayer has made a misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the tax return for that year.
[43] The burden is on the Crown to prove that the taxpayer made a misrepresentation and that the misrepresentation was attributable to neglect, carelessness, wilful default or fraud. In this regard, the Federal Court of Appeal stated the following:
Although the Minister has the benefit of the assumptions of fact underlying the reassessment, he[/she] does not enjoy any similar advantage with regard to proving the facts justifying a reassessment beyond the statutory period…. The Minister is undeniably required to adduce facts justifying these exceptional measures.
Accordingly, the Appellants are not subject to an evidentiary burden requiring them to demolish the assumptions of fact made by the Minister, as set out in paragraph 17 of the Boles Reply and paragraph 16 of the Reply in the Schroeder Appeals.
B. Errors in Reporting
[44] The Appellants made several reporting errors in their respective income tax returns for some of the taxation years that are in issue, in the context of subparagraph 152(4)(a)(i) of the ITA. Those errors include the following:
On April 5, 2004, one of the Appellants paid the amount of $12.99 for an on-command movie rental at Kings Island Resort. The Appellants deducted that amount as a business expense. That expenditure was a personal or living expense, which was not deductible in computing income.
The list of travel expenses deducted by the Appellants in computing their partnership’s income shows that, on November 30, 2005, they paid US$211.21 for accommodation at the Pointe Hilton Squaw Peak Resort, on December 1, 2005, they paid US$426.53 for accommodation in the same room at the same resort, and, on December 2, 2005, they paid US$607.57 for accommodation in the same room at the same resort. A comparison of the resort’s statements for those days with the entries on the list of travel expenses indicates that the amount of US$211.21 was claimed three times in respect of November 29, 2005, and the amount of US$215.32 was claimed twice in respect of November 30, 2005, while the amount of US$181.04 was claimed once in respect of December 1, 2005. Thus, it appears that there may have been triple-counting of the amount deducted in respect of the night of November 29-30, 2005, and double‑counting of the amount deducted for the night of November 30/December 1, 2005. Ms. Boles did not have an explanation for what appeared to be multiple-counting of the accommodation expenses.
For the 2005 taxation year, the Appellants reported gross income, from the Dog Activities, in the amount of $1. When questioned about that amount of gross income, Ms. Boles said that she thought that it “must be some sort of artifact.” She went on to say, “There was never, ever an income of a dollar. I’m confident in that.”
On January 13, 2006, Mr. Schroeder paid the amount of $1,310 to Dr. Raymond Greenfeld, who apparently is an endodontist who treats humans, and not dogs. The Appellants deducted that amount as a business expense. During cross-examination, Mr. Schroeder said that Dr. Greenfeld is not his dentist, and that he does not know Dr. Greenfeld. He also stated, “I obviously thought he was something to do with the dog world at the time…. You may be quite right, that may be a mistake.”
On February 11, 2007, while in New York City for the Westminster Dog Show, Mr. Schroeder purchased an admission to the Museum of Modern Art (“MOMA”) and shopped at the MOMA book store. In computing their income from the Dog Activities for 2007, the Appellants deducted the admission charge of C$48.21 (US$40.00) and the amount of C$70.41 (US$58.47) in respect of a purchase at the book store. During cross‑examination, Mr. Schroeder acknowledged that those amounts should not have been deducted as business expenses.
For the 2007 taxation year, Mr. Schroeder deducted a charitable donation in the amount of $1,000, as a rental expense. In addition, he suspected that he had also claimed a charitable donation tax credit in respect of the same expenditure. He acknowledged that the payment should not have been claimed as a rental expense, and that it had nothing to do with the Dog Activities.
On February 18, 2008, Mr. Schroeder made a payment of $47.77 to BC Liquor in Vancouver, and claimed that amount as a business expense. During cross-examination, he acknowledged that the deduction was a mistake, and that he should not have claimed that deduction.
On February 26, 2008, Mr. Schroeder paid US$348.16 (C$350.03) to Avis to rent a car in San Jose Del (as shown on the credit card statement), which apparently is an abbreviation for San Jose Del Cabo, which apparently is near the San Jose Del Cabo airport and Cabo San Lucas, in the Baja Peninsula of Mexico. The Appellants deducted that amount as a business expense. Mr. Schroeder seemed somewhat uncertain about the location of the Avis outlet, but he acknowledged that the charge had nothing to do with the Dog Activities, that he had attended his daughter’s wedding in Baja (although he could not remember the month or year of the wedding), and that he had rented a car on that occasion. He also acknowledged that, if the car rental related to his daughter’s wedding, the rental charge should not have been included with the deducted expenses, and that it would have been a mistake to do so.
C. Misrepresentations
[45] The above reporting errors constituted misrepresentations for the purpose of subparagraph 152(4)(a)(i) of the ITA. As indicated above, those misrepresentations related to the 2004, 2005, 2006, 2007 and 2008 taxation years.
[46] The Appellants operated the Dog Activities as a partnership. Therefore, the reporting errors discussed above led to misrepresentations on both of their income tax returns for the 2004‑2008 taxation years.
[47] The Crown submitted that there were misrepresentations in every year in issue (i.e., 2004 through 2008). Some of those submissions are discussed below.
D. Crown’s Submissions
(1) Business
[48] The Crown submitted that it was a misrepresentation for the Appellants to file their tax returns on the basis that the Dog Activities constituted a business.
[49] As will be discussed below, in undertaking the Dog Activities, the Appellants intended to commence and carry on a business. In many respects, they operated the Dog Activities as one would typically operate a business. They devoted significant amounts of time to the Dog Activities. They carefully researched Rottweiler bloodlines to ensure that their Foundation Pair would have, and would produce puppies with, championship qualities. They registered their kennel and dogs with the American Kennel Club. They networked with other dog owners, dog breeders and dog‑show participants. They sought out, and engaged, highly rated dog handlers to show their dogs. They advertised their kennel and dogs extensively. While their books and records in respect of the Dog Activities were not well organized, they did retain most, if not all, of the documents pertaining to those activities, sufficient (together with the documents pertaining to the Rental Properties) to fill 52 three‑ring (three‑inch diameter) binders with 16,103 pages of documents.
[50] In my view, the Appellants genuinely understood and believed that the Dog Activities constituted a business. Their understanding that they had a business was bona fide and honestly held. It is my view that the Appellants, with the assistance and advice of their accountants, thoughtfully and carefully considered the nature of the Dog Activities, and filed their income tax returns on the basis that those activities constituted a business.
[51] The issue of whether a taxpayer has a business or other source of income is a question of mixed fact and law (i.e., a determination of the proper test to be used to ascertain whether there is a source of income, and a consideration of the facts pertaining to the taxpayer to ascertain whether the test is satisfied). While some cases have held that any incorrect statement in an income tax return is a misrepresentation, other cases have indicated that, in some circumstances, an income tax return expressing a reasonable filing position, founded on a bona fide belief in the return’s correctness, and involving a determination of mixed fact and law, might not constitute a misrepresentation.
[52] In my view, it was reasonable for the Appellants to file their 2004‑2008 income tax returns on the basis that the Dog Activities constituted a business. In 2004, the Dog Activities were still nascent, having been commenced only five or so years previously. In 2008, the Dog Activities were still developing (for instance, Burton was campaigned from 2007 to February 2009, and he was the number 2 Rottweiler at Westminster in February 2009). Start‑up losses are not uncommon in any new business, particularly one that requires the development of championship‑pedigree breeding stock and that involves raising show dogs, which must be at least two years old to participate in regular competitions. Furthermore, in 2005, Mr. Schroeder was audited in respect of the rental losses with respect to 434 Panorama for the 2002 and 2003 taxation years. Given that the CRA chose not to audit Mr. Schroeder in respect of the Dog Activities, it was not unreasonable for him to believe that the CRA had no concerns in respect of the Dog Activities. In addition, when Ms. Boles filed her tax returns for 2006 and 2007, she did not know that she and Mr. Schroeder would go on to incur losses in respect of the Dog Activities from 2008 to 2016. Similarly, when Mr. Schroeder filed his tax returns for 2004 through 2008, he did not know that he and Ms. Boles would go on to incur losses in respect of the Dog Activities from 2009 to 2016. Therefore, in my view, it was reasonable for Ms. Boles to take the filing position that she did for the 2006 and 2007 taxation years, and for Mr. Schroeder to take the filing position that he did for the 2004-2008 taxation years. As well, the Appellants used professional accountants to prepare and file their income tax returns, which adds further support to the finding of reasonableness.
[53] In Regina Shoppers Mall, the Federal Court of Appeal quoted, with approval, the following statement by the trial judge:
Where a taxpayer thoughtfully, deliberately and carefully assesses the situation and files on what he believes bona fide to be the proper method there can be no misrepresentation as contemplated by section 152….
[54] The question of whether a taxpayer has a business is “a controversial issue, to be settled on the basis of the interpretation of the facts in evidence….” Accordingly, as Justice Lamarre (as she then was) said in Petric, “unless it can be said that the appellants’ view … was so unreasonable that it could not have been honestly held, there was no real misstatement.”
[55] I reiterate the following conclusions that were reached in Inwest Investments, after conducting a lengthy and thorough review of the leading cases decided in this Court and the Federal Court of Appeal:
126. I conclude from the foregoing authorities: …
b) a statement of a filing position that, even if that position may be incorrect, involves a determination of law or mixed fact and law will not be a misrepresentation if that filing position is reasonable; …
e) a difference of opinion between the CRA and the taxpayer is not sufficient to amount to a misrepresentation. Accordingly, if the Minister has a differing opinion on matters of legal interpretation or the legal characterization of the facts, it is obliged to reassess the tax return within the normal reassessment period.
[56] Summing up my views in respect of the filing position taken by the Appellants in their 2004‑2008 income tax returns, I note that, in Cameron, Justice Hogan indicated “that adopting a thoughtfully considered position that contradicts the Minister’s position does not in itself mean the taxpayer made a misrepresentation that would allow the Minister to assess outside the normal period.”
[57] Accordingly, I am of the view that the filing position taken by the Appellants for the 2004‑2008 taxation years (i.e., that the Dog Activities were a business) did not constitute a misrepresentation for the purpose of subparagraph 152(4)(a)(i) of the ITA.
(2) Judging
[58] The Crown submitted that, for every year in issue, Ms. Boles failed to report minimal amounts that she received for judging dogs. This submission runs counter to Ms. Boles’ assertion, during her cross‑examination, that she reported even modest stipends or honoraria that she received as a sweepstakes judge (which is a preliminary step to becoming a certified judge for AKC dog shows).
[59] Furthermore, my understanding is that the sweepstakes judging opportunities arose in later years. During her direct examination, she stated that it was 2004 when she took her first national breed club seminar, which was the first step to attaining her formal qualifications. When she testified in 2020, although she was close, she still had not fulfilled all the credentials needed to be approved as a dog-show judge. I am not aware of any judging activities that she had in 2004‑2008. The most significant sweepstakes that Ms. Boles judged was in 2017, which was long after the years that are in issue.
[60] In addition, Ms. Boles explained that, when one judges a sweepstakes sponsored by a club, the club generally covers part of the judge’s expenses, by paying a small honorarium, which, in accordance with custom, the judge typically returns to the club.[67] Thus, it is not clear that the honoraria were income; they seem to have been reimbursements of expenses.
[61] In drafting its Submissions, the Crown focused on a comment by Ms. Boles, when she said “… it would be a modest amount, somewhat under a thousand dollars I would think…” However, that comment was given in response to a question about whether she was then “in the money in terms of being paid … do you have revenue associated with what you do?” That question, which was asked on February 12, 2020, was asked in the present tense, and Ms. Boles gave her answer in the present tense. Accordingly, the Crown has not satisfied me that Ms. Boles failed to report all of her judging income, particularly in respect of 2004 through 2008.
[62] A further concern that I have is that, during oral argument, I asked counsel for the Crown if they could show me anything that would help me feel comfortable in saying that there had been a misrepresentation relating to unreported income from judging during the years in question. In an uncertain response, counsel said, “… So, no, it is not there…. Or, sorry, it could be. I don’t – I can’t find it right now.”
(3) Food and Entertainment
[63] The Crown submitted that, for every year in issue, the Appellants deducted the full amounts spent on food and entertainment, whereas, for each such expenditure, subsection 67.1(1) of the ITA limits the deduction to 50% of the applicable amount (or such lesser amount as is reasonable). According to the Crown, the deduction of 100%, rather than 50%, of the amounts spent on food and entertainment, was a misrepresentation that permitted the Minister to reassess each taxation year in question after the normal reassessment period.
[64] One of the difficulties that I have with the Crown’s submission is that the “Summary of Appellants’ ‘Statements of Business or Professional Activities’ for Ravenscrest Rottweilers”, which was prepared by the Crown, shows that the Appellants did not deduct any amount in 2006 in respect of meals and entertainment. That fact was confirmed by Mr. Schroeder during his cross‑examination.
[65] Another difficulty that I have with the Crown’s submission is that the above summary (i.e., Exhibit R‑2) does not provide any information (including information about meals and entertainment) in respect of 2004 and 2005.
[66] The Crown has not established that the Appellants deducted 100% of the cost of meals and entertainment. I understand that the Appellants may well have shown 100% of those costs on the working papers that they prepared and gave to their accountants, but that does not mean that the accountants put that amount on the Statement of Business Activities (Form T2124) or the Statement of Business or Professional Activities (Form T2125), as the case may have been, for the particular year.
[67] In reviewing Ms. Boles’ Statement of Business Activities (Form T2124) for 2006, I note that the description of the amount to be shown on line 8523 is “Meals and entertainment (allowable part only)”. That parenthetical phrase was undoubtedly a reminder to the person who prepared the form that only 50% of the cost of meals and entertainment was to be reported on line 8523. The form indicates that it was prepared by KPMG LLP. There was no evidence that KPMG LLP was not aware of the 50% limitation in respect of meals and entertainment. Furthermore, as noted above, the 2006 form did not report any amount for meals and entertainment.
[68] In its Submissions, the Crown stated that, for 2007, “The appellants expensed thousands of dollars for meals…. and always expensed in full (100%).” Yet, the Statement of Business Activities (Form T2124) for 2007 shows that only $610.40 (and not “thousands of dollars”) was reported on line 8523 as “Meals and entertainment” (which phrase, like the same phrase on the 2006 form, was followed by the reminder “allowable part only”). The 2007 form was prepared by Kabyer Remtilla CGA Co. Corp. Again, there was nothing to indicate that Mr. Remtilla was not aware of the requirement to report only 50% of the cost of meals and entertainment.
[69] In its Submissions in respect of the meals in 2007, the Crown singled out the cost of four meals in particular, namely, US$203.29 at Outback in Portland, $72.94 at Ginger House in “Westminster”, $476.89 at Greg’s Grill, and $114.40 at Ranchito. The total of those four amounts (ignoring the different currencies) is $867.52, which is more than the amount reported on the 2007 Form T2124 (i.e., $610.40, as shown above). Therefore, the Crown has failed to establish that the Appellants deducted 100% of the cost of meals and entertainment in 2007.
(4) Donations
[70] The Crown submitted that the Appellants expensed a $200 donation made on April 1, 2004. While a charitable donation is often a personal expenditure, in some circumstances, a donation can have a business purpose. The Crown did not adduce any evidence to show that this $200 donation did not have “a positive effect on the profits of the business.” [79] Nor was Ms. Boles cross‑examined in respect of this expenditure, even though she was questioned about other expenditures made in the same period of time.
[71] Some might think that I am treating the $200 donation in 2004 and the $1,000 donation in 2007 (which is discussed above) differently. One of the concerns that I have in respect of the $1,000 donation in 2007 is that the Appellants deducted it as a rental expense and also used it to claim a charitable donation tax credit. There was no evidence of such double‑counting in respect of the $200 donation in 2004. Furthermore, during cross‑examination, Mr. Schroeder acknowledged that the $1,000 donation should not have been deducted as a rental expense and that it had nothing to do with the Dog Activities,[81] whereas Ms. Boles was not questioned about the $200 donation. Consequently, I am not persuaded that the deduction of the $200 donation was a misrepresentation for the purpose of subparagraph 152(4)(a)(i) of the ITA.
(5) Personal or Living Expenses
[72] The Crown made a general submission that, for 2004, “the appellants expensed clothes, gift shop purchases, groceries, road atlas, BCAA membership, typewriter supply, etc.”, which constituted a misrepresentation. However, the Crown did not provide me with specific details or particulars to enable me to determine whether those expenditures were, or were not, incurred in respect of a business, or were personal or living expenses.
[73] Furthermore, the words of Justice Bowman (as he then was), in Ver, are pertinent in respect of the above-mentioned 2004 expenditures (as well as in respect of other items discussed below):
There is no evidence and no suggestion that any of the figures in the statement of income and expense were falsified, … or that the amounts claimed as expenses were not in fact incurred. The respondent’s criticism of the reporting of the loss is based upon certain propositions of law or mixed law and fact that the amounts were “not laid out for the purpose of gaining or producing income”[,] that there was “no reasonable expectation of profit”[,] and that the expenses were “personal or living expenses”. These points might be arguable in support of the merits of the assessments and they might form a basis for disallowance of some of the expenses, but matters of judgement[,] such as allocation of expenses between business and personal[,] are one thing that the Minister ought to pick up in the normal assessment process and within the three years that are given him[/her]. They are not the subject of misrepresentation within the meaning of subparagraph 152(4)(a)(i).
[74] Like the situation in Ver, I have not seen evidence or a suggestion that the amounts expended by the Appellants were falsified, or that the amounts deducted as expenses were not actually incurred. In fact, as noted above, at the commencement of the trial, the Crown put on the record a statement acknowledging that the amounts claimed as expenses by the Appellants were spent.
[75] As indicated above, in Ver, Justice Bowman indicated that the question of whether an expenditure was made for a business or a personal purpose is a matter of judgment, and not the subject of a misrepresentation within the meaning of subparagraph 152(4)(a)(i) of the ITA. I adopt that view, except to the extent that either of the Appellants has acknowledged, or it is patently obvious, that a particular expenditure was incurred for a personal purpose, or was not incurred for a business purpose, such as the $12.99 movie rental in 2004, the $1,310 paid to Dr. Greenfeld in 2006, the US$40 and the US$70.41 paid to MOMA in 2007, the $1,000 donation made in 2007, the $47.77 paid to BC Liquor in 2008 and the US$348.16 paid to Avis in 2008.
[76] The Crown submitted that, for 2006, the Appellants expensed personal and unreasonable amounts on veterinarian fees for Paris (who had been spayed) and for walking some of their dogs in Vancouver. However, the Crown has not persuaded me that, after Paris was spayed, she no longer had a role to play in promoting Ravenscrest Rottweilers (such as raising the kennel’s profile in the eyes of prospective customers), or that keeping Paris healthy was devoid of a business purpose. In addition, the above comments by Justice Bowman about matters of judgment are also applicable here. With respect to the dog‑walking expenditure, Ms. Boles explained that such walking was part of a conditioning program.
(6) Underreporting of Income
[77] The Crown submitted that the Appellants underreported their income for 2008. Although the Appellants reported gross income, for 2008, from the Dog Activities, in the amount of $1,500,[86] according to the Crown, the Appellants had at least four items of revenue that year, namely: (i) a cheque, dated January 11, 2008, in the amount of C$1,000 from Jeremy D. Feltren; (ii) a cheque, dated January 20, 2008, in the amount of US$300, which appears to be a prize awarded by Dog Fanciers Assoc. of Oregon, Inc.; (iii) a cheque in the amount of US$750 (which was not produced), accompanied by an undated note from someone named Amanda; and (iv) a payment of $1,000, as evidenced by a letter, dated November 4, 2008, from Hailey Jones, referencing a partial payment for a puppy by the name of Odin.
[78] In 2008, the relative values of the Canadian dollar and the US dollar were close to one another. Therefore, as I understand the Crown’s submission, the total of the four items described in the preceding paragraph was in the approximate range of $3,000 to $3,100 (i.e., C$1,000 + US$300 + US$750 +C$1,000), which was significantly more than the $1,500 of revenue that the Appellants had reported.
[79] During her cross‑examination, Ms. Boles pointed out that Mr. Feltren’s cheque was actually dated November 1, 2008, and that Mr. Feltren was about to marry Ms. Jones. Ms. Boles also pointed out that Ms. Jones’ letter expressly requested that Odin’s papers list both Hailey Jones and Jeremy Feltren as Odin’s owners. Therefore, the two $1,000 cheques that the Crown has identified in its Submissions were actually the same cheque.
[80] Ms. Boles advised that the undated note was sent by Amanda Halayco, and that the US$750 cheque represented a deposit for a half interest in a puppy named Aurora. During this portion of Ms. Boles’ cross‑examination, which occurred before the afternoon recess on March 20, 2024, Ms. Boles was uncertain as to when the US$750 had been paid. After the recess, Ms. Boles stated that, during the break, she had reviewed her records and had confirmed that the US$750 had been received by the Appellants in 2007, not 2008.
[81] Thus, contrary to what the Crown submitted, the Appellants had only two items of revenue in 2008, a cheque for C$1,000 and a cheque for US$300. Given that the Canada‑US currency exchange rate in 2008 was close to par, when the Appellants reported their 2008 revenue as being C$1,500, they were not underreporting, and there was no misrepresentation.
(7) Reliability of Submissions
[82] By reason of some of the matters discussed above, I have concerns about the reliability of the portion of the Crown’s Submissions that pertains to subparagraph 152(4)(a)(i) of the ITA. As noted above, the Crown submitted that, for every year in issue, the Appellants deducted 100%, rather than 50%, of the amounts spent on food and entertainment. Yet, Exhibit R‑2 showed that the Appellants did not deduct any amount in 2006 in respect of meals and entertainment, and Exhibit R‑2 did not contain any information in respect of 2004 and 2005. In addition, the Statement of Business Activities (Form T2124) for 2007 does not support the Crown’s submission that the Appellants deducted 100% of the cost of meals and entertainment.
[83] Another concern relates to the Crown’s submission that the Appellants received four cheques in 2008, when it was clear that the Crown was aware, from the statements made by Ms. Boles during her cross‑examination, that the Feltren cheque and the Jones cheque were one and the same, and that the Halayco cheque was received by the Appellants in 2007, not 2008.
[84] A further concern pertains to the Crown’s submission that, for every year in issue, Ms. Boles failed to report amounts received for judging, yet when pressed, the Crown could not refer me to anything in particular.
[85] Those errors demonstrate that, in drafting its Submissions, the Crown had a tendency to overstate the facts, at least insofar as the subparagraph 152(4)(a)(i) issue was concerned. Consequently, I do not have confidence in the subparagraph 152(4)(a)(i) portion of those Submissions.
[86] Therefore, while I am satisfied that the Appellants made the misrepresentations identified in paragraph 44 above, in respect of the 2004, 2005, 2006, 2007 and 2008 taxation years. The Crown has not persuaded me that the Appellants made a misrepresentation in respect of the items discussed in paragraphs 48 through 81 above.
E. Neglect or Carelessness
[87] I did not see any evidence of wilful default or fraud in respect of the 2004, 2005, 2006, 2007 and 2008 taxation years. Therefore, I will consider only neglect and carelessness.
(1) Business
[88] I held above that, when the Appellants reported on their income tax returns for 2004‑2008 that the Dog Activities were a business, they did not make a misrepresentation for the purpose of subparagraph 152(4)(a)(i) of the ITA. If that holding is wrong, it is necessary to ascertain whether the taking of that filing position was attributable to neglect or carelessness.
[89] In Paletta Estate, the Federal Court of Appeal stated:
Neglect under subparagraph 152(4)(a)(i) refers to a lack of reasonable care. The duty of reasonable care is met if the taxpayer has “thoughtfully, deliberately and carefully assesse[d] the situation and file[d] on what [he] believe[d] bona fide to be the proper method”; in other words, “in a manner that the taxpayer truly believe[d] to be correct” (Regina Shoppers Mall Ltd. v. Canada, [1990] 2 C.T.C. 183, 90 D.T.C. 6427 (F.C.T.D.); aff’d in Regina Shoppers Mall Ltd. v. Canada (1991), 126 N.R. 141, 91 D.T.C. 5101 (F.C.A.); see also Canada v. Johnson, 2012 FCA 253, 435 N.R. 361).
[90] As indicated in paragraph 50 above, I am of the view that the Appellants thoughtfully and carefully considered the nature of the Dog Activities, and, in consultation with their accountants, concluded that those activities were a business. After reviewing the evidence, it is my view that such conclusion was based on a reasonable and bona fide believe, which they honestly held. Therefore, if the statement in the Appellants’ income tax returns for 2004‑2008 to the effect that they had a business was incorrect, and if such erroneous statement was a misrepresentation for the purpose of subparagraph 152(4)(a)(i), such misrepresentation was not attributable to carelessness or neglect.
(2) Personal or Living Expenses
[91] Turning to the allegedly personal expenditures, as will be explained more fully below, sometime after the end of each year, to determine which expenses the Appellants would deduct in computing their income, Mr. Schroeder went through all of his credit card statements and highlighted those expenditures which he thought pertained to the Dog Activities or the Rental Properties. This exercise required him, as a matter of judgment, to determine whether each expenditure was made for a business purpose or a personal purpose. However, as was illustrated above, on occasion, either because he made an incorrect judgment call, or because he was momentarily inattentive, he highlighted expenditures that ought not to have been deducted.
[92] To the extent that Mr. Schroeder made an error of judgment in distinguishing between a business expense and a personal expense, as indicated by Justice Bowman in Ver, there was not a misrepresentation. To the extent that Mr. Schroeder did not put his mind to a particular expenditure, or was inattentive, it becomes necessary to determine whether he was careless or neglectful.
[93] If Mr. Schroeder were to have identified, classified and recorded expenditures on a current basis, rather than waiting (sometimes for many months) until after the year-end, to undertake that exercise, classification mistakes would have been less likely to occur. Mr. Schroeder recognized that, by delaying the classification of expenditures until after the year‑end, mistakes were possible. In my view, that demonstrated carelessness on the part of Mr. Schroeder.
[94] As I have found that there was carelessness, I do not need to consider whether there was also neglect, in the context of the personal or living expenses.
(3) Revenue from Dog Activities in 2005
[95] As indicated in Paletta Estate, “Neglect under subparagraph 152(4)(a)(i) refers to a lack of reasonable care.” In my view it was neglectful to report $1 of gross revenue from the Dog Activities in 2005.
F. Limited Scope to Reassess
[96] Although we sometimes speak of a taxation year being statute-barred by reason of subsection 152(4) of the ITA, subparagraph 152(4.01)(a)(i) clarifies that, rather than being determined on a year‑by‑year basis, “statute‑barring” is determined on an issue‑by‑issue basis (or technically, a reasonably‑related‑to‑the‑misrepresentation matter‑by‑matter basis). Strictly speaking, where a taxpayer has made a misrepresentation attributable to neglect, carelessness or wilful default or has committed fraud in filing a return, the Minister may reassess, but only to the extent that the reassessment can reasonably be regarded as relating to that misrepresentation. In other words, the reassessment must be confined to the subject matter of the misrepresentation and any other matter that can reasonably be regarded as relating to that misrepresentation.
[97] The misrepresentations that I have identified above relate to:
the movie rental in 2004;
the accommodation at the Point Hilton Squaw Peak Resort from November 29, 2005 to December 2, 2005;
the amount of the revenue from the Dog Activities in 2005;
the payment to Dr. Greenfeld on January 13, 2006;
the payments to MOMA on February 11, 2007;
the donation of $1,000 in 2007;
the payment to BC Liquor on February 18, 2008; and
the payment to Avis on February 26, 2008.
[98] To the extent that the Reassessments were based on a determination or an assumption that the Dog Activities were a hobby, and not a business, those portions of the Reassessments could not reasonably be regarded as relating to the above misrepresentations.
[99] Turning to the question of whether some of the Appellants’ expenses were personal or living expenses, in Strum, Justice Russell held that two identified misrepresentations pertaining to claimed business expenses in respect of a particular taxation year could be reasonably regarded as relating to other claimed business expenses in the same year, thus permitting the Minister to reassess in respect of all claimed business expenses in that year. While I do not disagree with Justice Russell’s finding, that case was an informal-procedure appeal, and thus has no precedential value. Furthermore, it does not appear that there was an issue in that case concerning Justice Bowman’s comments about the matter of judgment that arises when distinguishing between business and personal expenses.
[100] Notwithstanding that Strum was an informal-procedure appeal, it propounds a sound principle. However, the application of that principle to these Appeals must be tempered by the Ver principle that, where a matter of judgment is involved in allocating expenses between a business and a personal purpose, the exercise of that judgment is not a misrepresentation within the meaning of subparagraph 152(4)(a)(i).
[101] I am of the view that expenditures in respect of veterinary services, dog handling, dog walking, dog boarding and advertising were, as a matter of judgment, reasonably allocable by the Appellants to a business purpose, rather than a personal purpose. Therefore, the expenditures in respect of those services by Ms. Boles in 2006 and 2007 and by Mr. Schroeder in 2004 through 2008 are statute-barred.
[102] On the other hand, there were some expenditures that did not involve a matter of judgment and that were clearly personal. Such expenditures by Ms. Boles in 2006 and 2007 and by Mr. Schroeder in 2004 through 2008 may, by reason of the Strum principle, be the subject of reassessment by the Minister outside the normal reassessment period.
G. Decision
[103] When distinguishing between business expenses and personal expenses, for the purpose of filing their 2004, 2005, 2006, 2007 and 2008 income tax returns, the Appellants made misrepresentations, in respect of the expenditures identified in paragraphs 44 and 97 above, that were attributable to carelessness or neglect. Therefore, in accordance with subparagraph 152(4)(a)(i) of the ITA, the Minister was permitted to reassess the Appellants in respect of those expenditures, after their respective normal reassessment periods for those years.
[104] During the six‑week trial, as counsel for the Appellants tediously took us through invoice after invoice and receipt after receipt, relating to the numerous expenditures that the Appellants had made, over the years, in respect of the Dog Activities and the Rental Properties, I invited the parties to come to an agreement so as to organize the expenditures by category, and then tally the aggregate amount of the expenditures in each category. I invited the parties to identify the categories of expenditures that were clearly business related and the categories of expenditures in respect of which it would be necessary to determine whether they were business related or personal related. That invitation was not accepted. Upon hearing submissions from counsel in respect of that invitation, I ultimately, and reluctantly, withdrew it.
[105] The large number of documents produced by the Appellants, which were contained in 54 large three-ring binders, without a table of contents, with no readily apparent organizational structure, and without any tabulated summary of the various expenditures, has created challenges for the Court. Consequently, apart from the expenditures identified in paragraphs 44 and 97 above, it has been difficult and cumbersome to identify specific expenditures that were clearly personal in nature, as distinct from those which, in determining whether they were business expenses or personal expenses, may have been matters of judgment. Therefore, in attempting to apply the Strum principle, I have endeavoured, with the assistance of several of the Court’s law clerks, to find, identify and determine whether there were additional expenditures that were clearly personal, as distinct from those whose determination may have been “matters of judgment” of the type discussed by Justice Bowman in Ver. The “personal or living” expenditures that were the subject of the misrepresentations listed above and the “personal or living” expenditures that can reasonably be regarded as relating to those listed misrepresentations are tabulated in Schedule C. The Minister was not precluded by subsection 152(4) of the ITA from reassessing the Appellants, after the applicable normal reassessment periods, in respect of the expenditures listed in Schedule C.
[106] As noted above, when reassessing Ms. Boles in respect of the 2006 and 2007 taxation years and Mr. Schroeder in respect of the 2004 through 2008 taxation years, the Minister was precluded, by reason of subsection 152(4) and subparagraph 152(4.01)(a)(i) of the ITA, from treating the Dog Activities as a hobby, rather than as a business.
[107] With respect to the Rental Properties, apart for the $1,000 donation in 2007 that was claimed as a rental expense and the US$3,000 cost of a watercolour painting discussed below, subsection 152(4) and subparagraph 152(4.01)(a)(i) of the ITA precluded the Minister from reassessing Ms. Boles in respect of the 2006 and 2007 taxation years and Mr. Schroeder in respect of the 2004 through 2008 taxation years.
VI. ANALYSIS OF ACTIVITIES
A. Factors to be Considered
[108] As explained in Stewart, when analyzing the source‑of‑income question, it is necessary to consider the taxpayer’s subjective intention (to ascertain whether it was an intention to carry on a particular activity in pursuit of profit, sometimes referred to as a commercial intent). It is also necessary to ascertain whether such intention is supported by evidence of objective factors. Where there might be a personal or hobby element, the taxpayer is required to prove “that his or her predominant intention [was] to make a profit from the activity and that the activity has been carried out in accordance with objective standards of businesslike behaviour.”
[109] In addition, as discussed above, the Stewart, Moldowan, Brown, Savage, Tweneboah and Preston cases identified a variety of factors to be considered when determining whether an activity, which might have a personal or hobby element, is a source of income. Those factors are sometimes referred to as “indicia of commerciality” or “badges of trade”. It is also helpful to review the commercial nature of the activity, i.e., “all the trappings that tend to go hand‑in‑hand with a business venture.” As well, it is necessary to note that the list of identified factors is not exhaustive.
[110] I will discuss the above criteria and factors in the following order:
Personal endeavour.
Intention.
Commerciality — objective standards of businesslike behaviour:
(a)Profit and loss experience;
(b)Training;
(c)Intended (and actual) course of action:
Business plan and goals;
Financing;
Budgeting and expense management;
Risk management;
Advertising and marketing;
Record keeping;
Business strategy;
Redirection, as needed; and
(d)Capability of venture to show a profit.
B. Dog‑Related Activities
(1) Personal Endeavour
[111] The first stage of the Stewart approach requires a court to determine whether the particular activity of the taxpayer is “undertaken in pursuit of profit, or is it a personal endeavour”. However, in answering that inquiry, it seems that the court is not required to determine at the outset whether the activity is definitively a personal endeavour. Rather, because the focus of the source question (i.e., the issue of whether or not a taxpayer has a source of income) “is to be determined by looking at the commerciality of the activity in question”, the court is initially directed to conduct a tentative review of the personal nature of the activity. Consider the following statements by Justices Iacobucci and Bastarache:
“… where there is a suspicion that the taxpayer’s activity is a hobby or personal endeavour rather than a business, the taxpayer’s so‑called reasonable expectation of profit is a factor, among others, which can be examined to ascertain whether the taxpayer has a commercial intent [emphasis added].”[107]
“… where the nature of a taxpayer’s venture contains elements which suggest that it could be considered a hobby or other personal pursuit, but the venture is undertaken in a sufficiently commercial manner, the venture will be considered a source of income for the purposes of the Act [emphasis added].”[108]
“We emphasize that this “pursuit of profit” source test will only require analysis in situations where there is some personal or hobby element to the activity in question [emphasis added].”[109]
“Where the activity could be classified as a personal pursuit, then it must be determined whether or not the activity is being carried on in a sufficiently commercial manner to constitute a source of income [emphasis added].”[110]
[112] Consequently, the court is not to focus on whether the activity is a personal endeavour or hobby. Rather, the court is to focus on whether the activity is a source of income.
[113] Thus, if a court is of the view that a particular activity might possibly be a personal endeavour or might possibly have a personal or hobby element, the court, in considering the source question, is required to “focus on the activity itself” and to analyze the commerciality of the activity.
[114] I am of the view that the Dog Activities could be classified as a personal pursuit or, in other words, those activities may have had a personal or hobby element. The Appellants have a great love and admiration for dogs. At least since her adolescence, Ms. Boles has had a connection to both dogs and horses. As a teenager in Ottawa, she worked at a horse stable, saved her money, and eventually purchased and showed her own horses. She also purchased and showed various dogs, including several Vizslas. She registered her kennel under the name Amberlight. While being cross‑examined about the sale of one of her horses, in anticipation of her relocation to Vancouver to attend law school, Ms. Boles stated that her horse‑related activities had been a hobby.
[115] Having determined that the Dog Activities could possibly be classified as a personal pursuit or may have been a hobby, in determining whether those activities were a source of income, I will next focus on the activities and consider the factors enumerated above.
(2) Intention
[116] It seems that the Appellants’ subjective predominant intention with the Dog Activities was to make a profit. The Appellants argue that they started the Dog Activities because they wanted to diversify their sources of income. Ms. Boles testified that she was taught the importance of having multiple sources of income from her grandfather and parents. Ms. Boles stated that her grandfather advised her to have three sources of income, which she called “the rule of three”.
[117] In June 1994, Ms. Boles broke her back in a horse-jumping incident. At the time of her injury, Ms. Boles did not have any sources of income other than her law practice. Shortly after, Ms. Boles began diversifying her sources of income, including purchasing a three-floor house, which she renovated and rented out, one level at a time. In 1996, Ms. Boles purchased another rental property with three other women. As discussed later in these reasons, in her youth, Ms. Boles made a significant profit in the purchase and sale of a stallion. These entrepreneurial ventures demonstrate that Ms. Boles has a history of diversifying her sources of income. Ms. Boles testified that from 1996, she and Mr. Schroeder had many conversations about possible options for diversifying their income.
[118] Before starting the Dog Activities, Ms. Boles extensively researched the internet and determined that Rottweilers were a popular and suitable breed for the Dog Activities. Similarly, the Appellants decided to expand to French bulldogs because they believed that French bulldogs would be a lucrative breed. Therefore, in my view, the Appellants’ subjective intention with the Dog Activities was to make a profit.
(3) Commerciality — Objective Standards of Businesslike Behaviour
(a) Profit and Loss Experience
[119] The Crown referred to Bodanis v. The Queen, where the Court stated, “[Section 67 reasonableness] is also a component in the question whether a particular activity is a business. For example, it cannot be said, in the absence of compelling reasons, that a person would spend $1,000,000 if all that could reasonably be expected to be earned was $1,000”. However, the Supreme Court rejected this reasoning in Stewart, where it stated, “If the deductibility of a particular expense is in question, then it is not the existence of a source of income which ought to be questioned, but the relationship between that expense and the source to which it is purported to relate. … [E]xcessive or unreasonable expenses have no bearing on the characterization of a particular activity as a source of income”.
[120] The Dog Activities did not make a profit from 1996-2016. Becky Sumner, the Appellants’ expert witness, opined that activities generating hundreds of thousands of dollars of losses for up to fifteen years cannot be a business. From 2004 to 2010, the Appellants claimed about $803,070 in losses. From 1999 to 2016, the Appellants claimed $998,558 in losses and only $45,801 in gross income from the Dog Activities.
[121] The Appellants argue that, because of the nature of the Dog Activities, they expected to make significant investments to develop long-term assets for the purported business. The Appellants also argue that the CRA’s audit and reassessments of their incomes put a chill on their business activities, causing them to cut back on engaging in the Dog Activities. However, the substantial losses generated by the Appellants in the years in issue suggest that the Dog Activities lacked commerciality.
(b) Training
[122] The Appellants did not have formal professional training in dog breeding prior to starting the Dog Activities. However, Ms. Boles had owned dogs and horses, had done some breeding work, and had worked in a barn in her youth. At a young age, Ms. Boles worked at a kennel, cleaning, grooming and showing dogs. When she was thirteen years old, Ms. Boles worked at a veterinary clinic. When Ms. Boles was seventeen, she began working for Sidney Cwinn, the owner of a barn called Erawan, including showing his horses in the United States and Canada, and making breeding decisions for two stallions. When she was about twenty, Ms. Boles purchased a show puppy and built a kennel on her parents’ property. Ms. Boles considered showing her dogs and horses a hobby during this time. In 1982, Ms. Boles purchased a stallion for US$6,000, showed him in Canada, and sold him for US$50,000 in 1984. Mr. Schroeder had no training or experience with dogs.
[123] Ms. Boles qualified as a dog judge in 2022. Prior to that, she had attended seminars and had received certificates to become qualified as a judge. A requirement to becoming a dog judge is having experience breeding championship dogs. As such, Ms. Boles was not, and could not have been, a qualified dog judge prior to starting the Dog Activities. However, it took Ms. Boles a substantial amount of time to become qualified as a dog judge.
[124] The Crown argues that many hobby enthusiasts have in-depth knowledge about their hobby, thus the Appellants’ extensive knowledge about dogs does not make the Dog Activities a business. However, overall, Ms. Boles’ extensive experience with animals suggests that the Dog Activities may have been a business.
(c) Intended (and Actual) Course of Action
(i) Business Plan and Goals
[125] Mr. Schroeder acknowledged that Ms. Boles and he did not have a written business plan in respect of the Dog Activities. However, he asserted that they had a verbal plan, which included securing a long‑term asset, of which a semen bank (in respect of dogs whose semen was in demand) would be a part. He considered the semen bank to be the significant asset, because the dogs themselves had a lifespan. He did not consider the ongoing puppies to be an asset; rather, they were “part of an operational business where [he] was spending money and hopefully selling puppies.”
[126] Ms. Boles described Phase One of their verbal business plan as the search for, and acquisition of Khan, their foundation male. Subsequent phases included showing and titling Khan in both Canada and the United States, searching for and acquiring their foundation female, registering their kennel, designing a website and business cards, advertising, breeding the foundation female, and selling puppies.
[127] Ms. Boles identified four categories of revenue:
proceeds of the sale of puppies,
proceeds of co‑breeding (i.e., revenue from puppy sales was split with another breeder),
revenue from stud services, and,
proceeds of the sale of adult dogs which have already produced puppies.
In addition, Ms. Boles also considered that her dog show judging would be an ancillary source of revenue.
[128] Thus, the Appellants’ verbal business plan included thoroughly researching Rottweiler bloodlines; carefully selecting the sire and the bitch that would be their Foundation Pair; showing those two dogs so as to achieve the requisite titles and championships; breeding the dogs; birthing and raising the puppies; obtaining the needed health clearances in respect of the puppies; showing the puppies once they attained the age of two years; selling some of the puppies; selecting one or more of the puppies to be shown further, and possibly campaigned, with a view to winning (or coming close) to a national championship; and collecting, storing and selling semen.
[129] While some cases, such as Savage, indicate that a written business plan is an element of businesslike behavior, the necessity of the plan being written might not be as critical in the case of a sole proprietorship or a small husband-wife partnership. In other words, the Appellants’ verbal plan may have been adequate and sufficient for them. Additionally, Ms. Sumner, the Appellants’ expert witness, testified that it is challenging for breeders to make specific plans with timelines because it is difficult to predict whether a breeding will be successful or when animals may die.
[130] Consequently, given that the Appellants had a verbal business plan in respect of the Dog Activities, I do not consider the lack of a written plan to indicate that they did not display businesslike behavior.
(ii) Financing
[131] In Stewart, Justices Iacobucci and Bastarache said the following about financing:
Clearly the existence of financing does not indicate that the underlying activity should not be characterized as a source of income. On the contrary, the fact that an activity has been financed externally is an indication that the taxpayer is operating his or her activity in a businesslike manner. As such, the existence of financing is an element which adds to the commerciality of a venture, and thus operates in favour of characterizing the activity as a source of income. [Underlining in the original.]
[132] The Appellants did not seek or obtain external financing (other than their credit cards, as discussed below) for the Dog Activities. As well, they rejected the idea of obtaining the financial assistance of a backer. Mr. Schroeder explained that the reason for not having a backer was that they wanted to have “complete control over how the breeding development unfolded” and over “the development of the kennel.”
[133] Mr. Schroeder testified that he did not have any loans or lines of credit in respect of the Dog Activities, and that he had no financing in respect of the Dog Activities, other than his credit cards. During the period 2004 to 2010, Mr. Schroeder had two credit cards in his name, one which he had acquired for purposes related to his law practice, and the other for personal purposes. One bore interest on the unpaid balance at the rate of 19.5%; the other at 24% (there was no evidence as to which credit card bore which rate of interest). Mr. Schroeder stated that he used both credit cards to pay expenditures in respect of the Dog Activities. Each credit card had a credit limit of $50,000. Every month of the taxation years in issue Mr. Schroeder carried an unpaid balance on each credit card.
[134] Together, the two cards generally accrued hundreds of dollars of interest every month, or thousands of dollars of interest every year. Not all of the charges put on the credit cards related to the Dog Activities, but, in some months, a large portion of the charges were dog‑related, particularly in 2004‑2005 (when the Magic Litter was born, raised and sold), and especially in 2006‑2009 (during Burton’s campaign and the Westminster dog shows). Mr. Schroeder acknowledged that, for every year from 2004 to 2010, he accrued more in interest on his credit cards in respect of the Dog Activities than the amount which he reported as gross income from the Dog Activities.
[135] Mr. Schroeder also acknowledged that, in computing his income for 2004‑2010, he did not claim or try to expense the interest that had accrued on his credit cards in respect of the expenditures related to the Dog Activities. When asked on cross‑examination whether, in retrospect, he should have deducted the interest paid in respect of dog-related expenditures, he stated:
… I suppose if I thought about it for a minute, yes, I certainly would have claimed it. It was a lot of money.
[136] The Appellants’ decision not to obtain external financing (other than their credit cards) in respect of the Dog Activities, which resulted in exorbitant interest charges, diminished the commerciality of those activities. Insofar as financing was concerned, the Appellants did not operate the Dog Activities in a businesslike manner.
(iii) Budgeting and Expense Management
(1) Budgeting
[137] The Appellants did not have a formal written budget. Mr. Schroeder said that he had set a budget of $250,000 for himself. However, Mr. Schroeder admitted that he had exceeded his $250,000 budget by 2010, and a large part of his budget was spent on trying to save their dog Willy, who had cancer. Ms. Boles testified that the Appellants would discuss advertising budgets and how much money they intended to spend on specific shows. However, Ms. Boles confirmed that the Appellants had no defined dollar limit each year for the Dog Activities. Additionally, the Appellants did not have a formal written budget, setting out what they intended to spend each year, but rather made many budgetary decisions as they arose or in anticipation of them arising. This factor was not consistent with objective standards of businesslike behaviour.
(2) Expense Management
[138] The Appellants did not apply for, open or maintain a separate bank account for the Dog Activities. It seems that the Appellants were not conservative in their spending on Dog Activities. Mr. Schroeder stated that the Appellants spent about $50,000 on cancer treatment for Willie, one of their French bulldogs, whereas Ms. Boles said that they spent only about $17,000 to $18,000, net of subsidies. They also spent a significant amount of money on dog massages. However, Ms. Boles testified that the massages were necessary therapeutic medical massages, and that the Appellants viewed them as a proactive treatment for issues with the dogs. The Appellants also spent $1,600 on an oil painting of Burton. The Crown argues that the Appellants should have decreased their spending, considering the significant losses that the Dog Activities were generating. The Appellants’ spending on the Dog Activities is detailed further below in the discussion about personal and unreasonable expenses. My view is that the Appellants did not manage their expenses in a businesslike manner.
(iv) Risk Management
[139] The Appellants began the Dog Activities with the understanding that it involved substantial risk. Mr. Schroeder testified, “then I said, as I would normally do with anything I was going to put my money into, I said ‘okay, that’s find, what’s the risk factor?’ … it’s a pretty high-risk business. The rewards, if it works out the rewards are very good, okay? And the sky’s the limit, quite frankly, if you’ve got a champion dog in a popular breed you make big returns, big money – but the risks are high”.
[140] The Appellants managed the risk of losing semen assets by storing their dogs’ semen in semen banks located in different countries. At times, the Appellants had health insurance on a number of their dogs. This factor was consistent with objective standards of businesslike behaviour.
(v) Advertising and Marketing
[141] The Appellants adopted the Ravenscrest kennel name to develop their brand. The Appellants established a website, www.ravenscrest.com, to market their puppies and stud services. The Appellants advertised their dogs, including in the Canine Review and a centerfold advertisement in the 2002 program for the National Speciality. Ms. Boles testified that the Appellants did not create a written short-term versus long-term marketing strategy for the Dog Activities.
[142] The Appellants were very selective in choosing purchasers for the puppies of their first litter because they wanted to ensure that their puppies went to homes that would accomplish things with them, to provide publicity for the Ravenscrest brand. Additionally, rather than selling all of their puppies, the Appellants placed some puppies in co-ownership. Co-ownership arrangements provided less revenue to the Appellants upfront, but they hoped that it would help build the Ravenscrest brand through the anticipated offspring of those dogs.
[143] This factor points in both directions. Their advertising was done in a businesslike manner, but their marketing was perhaps too restrictive, and was not designed to maximize revenues.
(vi) Record Keeping
[144] Mr. Schroeder used his law office manager and bookkeeper, Kathy Hawley, not only to keep track of his law firm’s receipts, expenditures and other financial matters, but also to do something similar in respect of the Dog Activities and the Rental Properties. Focusing for now on the Dog Activities, Mr. Schroeder’s monthly VISA statements were one of the main sources of information that Ms. Hawley and he used to compile the financial records pertaining to his expenditures in respect of those activities. At the end of each year, he went through the statements and marked the items that related to the Dog Activities (as well as the Rental Properties). Ms. Hawley then compiled working papers.
[145] Ms. Boles also used staff members in her legal office to keep track of her receipts and expenditures in respect of the Dog Activities (as well as her receipts and expenditures in respect of her law practice and the Rental Properties). When Ms. Boles needed to write a cheque to pay an amount pertaining to the Dog Activities, she wrote that cheque on her law office’s chequing account, and the cheque was recorded in the general ledger for the law office. Periodically, Ms. Boles reviewed a copy of the general ledger, and, using a colour‑coded system, marked the receipts and expenditures that related to the Dog Activities and the Rental Properties, respectively.
[146] After each year‑end, as “tax time” approached, the Appellants gathered their invoices, receipts and other similar documents from wherever those documents happened to be kept, and embarked on a “build‑up process.” Mr. Schroeder described the procedure as follows:
And I think I said on that accounting side there was a build‑up process. In other words, the early days -- you know, it was kind of year-end, it was tax time, and you'd go -- we would go into the glove compartment of the truck and pull out, you know, information on gas receipts. You know, the stuff -- we were operating on a kind of getting going business and so there's receipts here, there's invoices there, and so we're pulling that together at the early stages and we're working away over the years getting it tighter. And I think the system remained the same. Certainly through to 2010, because Cathy [sic] retired in 2010 just by -- just it was coincidence, but we tried to get it tighter and tighter.
[147] After Mr. Schroeder and Ms. Hawley had prepared year‑end working papers in respect of Mr. Schroeder’s dog‑related receipts and expenditures, and Ms. Boles and the staff in her law office had done something similar in respect of Ms. Boles’ dog‑related receipts and expenditures, Ms. Hawley communicated with her counterpart in Ms. Boles’ office to merge the two sets of documents. The merged working papers were then given to the respective accountants of Mr. Schroeder and Ms. Boles.
[148] Historically, as Mr. Schroeder and Ms. Boles had commenced their respective law practices long before they married, they had separate accountants to look after their accounting and tax reporting needs. In the early years of the Dog Activities, Mr. Schroeder and Ms. Boles continued to use their own accountants to do the accounting for their participation in the Dog Activities. Mr. Schroeder’s accountants were Len Dodson and Wendy Lum of KPMG. For a number of years, Erick Cardona, CPA, was the in‑house accountant for Ms. Boles’ law corporation. Over the period 1998 through 2010, Ms. Boles used various external accounting firms, including Wendy Lum in 2006, and, at other times, a firm called Rentilla and Company, and Dave VanHatten of the firm Ellis Foster.
[149] As indicated in the above excerpt from Mr. Schroeder’s testimony, in the early years of the Dog Activities, the financial records were gathered and the working papers were compiled only after year‑end. However, with prodding and insistence from Ms. Hawley, the process was, over time, gradually accelerated, to the point that eventually Mr. Schroeder and Ms. Boles came close to assembling, compiling and recording their dog-related receipts and expenditures on almost a monthly basis.
[150] Notwithstanding the progress that the Appellants made in tightening up their record keeping, they were not able to achieve the same level of record keeping in respect of the Dog Activities as Mr. Schroeder had in respect of his law practice. He put it this way:
Q. So are you confirming then that -- or testifying that from 2000 till at least 2010 Cathy did these working papers at least monthly and between your office and Pam's office, or Ms. Boles' law firm you did sort of monthly statements. Are those financials? Is that what you're saying?
A. For the dog business?
Q. Yes.
A. Oh, she always had -- I always had for the firm. I had monthly statements. You know, highly detailed --
Q. No, but you're talking about the dog activities.
A. The dog activity -- and perhaps, I apologize, I may have not been clear about it. I believe we got towards monthly organization of the accounts. Not that that was the -- you know, we'd achieved a nice discipline to it. But we had certainly progressed from the 2003, 2004 years where we were year‑end trying to pull together all of this information from various sources so Cath could do that first draft. We got a little more refined. Never to what I would have called tight. What I considered, what I wanted for my own law practice which was tight monthly financial reporting. To me.
Q. So, sorry, tight monthly financial reporting?
A. Yes.
Q. But in respect of the dog activities is what I --
A. Right, but no I said in relation to my firm I'd always insisted on that. We never achieved that in the dog business.
[151] In listening to Ms. Boles explain, during her direct examination, the colour‑coded system that she used to categorize the various receipts and expenditures that were recorded in her law office’s general ledger for the period January 1, 2002 to December 31, 2002, in order to allocate them to her legal practice, the Dog Activities and the Rental Properties respectively, it seemed to me that the system was effective and accurate, although it was likely not as easy to review or use, as would have been the case if separate ledgers were to have been kept for each of those three activities. Furthermore, the colour‑coded ledger was produced for only one year, 2002, which predated the taxation years that are in issue in these Appeals.
[152] During the cross‑examination of Ms. Boles, I was given to understand that, in subsequent years, her record‑keeping system broke down. Ms. Boles acknowledged that, from 2000 to 2006, the books and records in respect of her law practice were in “serious disarray”.
[153] The Appellants did not maintain a separate ledger for the Dog Activities. Ms. Boles regularly wrote cheques on her law office general account to pay for dog‑related expenditures, and those cheques were listed on the law office’s general ledger. The absence of a separate general ledger for the Dog Activities was not consistent with objective standards of businesslike behaviour.
(vii) Business Strategy
[154] A key element of the Appellants’ business strategy was to obtain and maintain healthy breeding animals, particularly because the Rottweiler breed has a predominant sire problem, which poses risks concerning in‑breeding. However, due to the Appellants’ careful selection of their Foundation Pair (i.e., Khan and Paris), Burton and other Ravenscrest males did not have a pedigree with a predominant sire problem. Therefore, Ravenscrest semen, and, in particular, Burton’s semen, was, and continues to be, in demand.
[155] Another element of the Appellants’ business strategy was to be selective in respect of puppy sales, semen sales and stud services. In other words, not only did the Appellants focus on the health of their own dogs, but they were also concerned about the health of the dogs to which Ravenscrest dogs were bred.
[156] For instance, when litters were expected, the Appellants kept a puppy reservation list of persons who were interested in buying one of the puppies. They screened the prospective buyers, to ensure that the puppies would be well cared for and well raised.
[157] Similarly, when selling semen, the Appellants carefully screened (and continue to screen) prospective semen buyers, to ensure that each buyer’s bitch was healthy and did not have defects that might be passed onto the puppies. The Appellants wanted to minimize the risk that any puppies sired by one of their dogs would have problems or defects, which could diminish the value of the remaining semen in their inventory. Mr. Schroeder stated that their decision to be selective in selling semen was part of a longer‑term breeding strategy.
[158] As will be discussed below, the Appellants’ selective breeding strategy contributed to reduced revenue from the sale of semen and stud fees.
[159] The fact that the Appellants had a business strategy is consistent with objective standards of businesslike behaviour. However, it is arguable that their decision to be highly selective and discriminating in semen sales and breeding, while commendable in some respects, had an adverse effect on their bottom line. Thus, the limited nature of that strategy was not necessarily in keeping with objective standards of businesslike behaviour, particularly given that, according to Mr. Schroeder, the owner of Shaka, the American Rottweiler Club number one Rottweiler in 2005, arranged for Shaka to sire 50 to 100 litters, with the puppies being sold at $5,000 each. On the other hand, Burton was bred only ten times over the course of his life, resulting in substantially fewer litters and substantially less revenue.
[160] The Crown argues that the Appellants’ decision to reject a $100,000 offer for the purchase of Burton was not commercially reasonable. However, Mr. Schroeder testified that the Appellants were not interested in the offer because they had invested about $250,000 in Burton at that point, and he was the foundation of the development of their kennel.
[161] Overall, this factor points in both directions. The efforts to ensure that puppies would be healthy and of a high quality is consistent with standards of a championship-dog breeder, but the strategy of limiting breeding opportunities and semen sales had an adverse effect on revenue.
(viii) Redirection, as Needed
[162] During direct examination, when asked how he was going to get back the money that he had spent on the Dog Activities, particularly Burton’s campaign, Mr. Schroeder replied:
Well, I think my plan, as I described it at the outset, and it hadn't changed. You know, I had made a business decision, a financial decision when I knew that I had a dog that could be campaigned to stay with the program. I was comfortable that, you know, I was going to spend the years 2007, 2008, my own money in those two years combined, probably somewhere upwards of a $100,000.
And I explained at the outset, the payoff on the dog breeding side of things was still uncertain. At that stage I didn't know whether I had -- if I had the brass ring in my hand with Burton. I mean, for me, for me, the brass ring was if the campaign succeeded, the two-year campaign succeeded and for me, the final ring of that was Westminster. If my dog took the breed and I certainly believed on what I had seen through 2008, my dog had a very real chance at winning the group at Westminster, which would have put him in the ring in New York in Madison Square Garden to be the best dog at Westminster. And that's the brass ring, and that was the big breeding money.
Now, okay, and that program is still in place, and if I'd gotten there, I'd have gotten my 200,000 bucks back real quick….
So how was I going to get it back? I was still on the program. It was still making sense to me and I was prepared to keep putting my money up. And I headed to Westminster after the second year of the campaign with my dog number two Rottweiler in the United States, the number ten working dog in the United States, and I said, you know, if this comes to pass, then yeah, I'm going to have that $200,000 back real quick.
[163] The above comments suggest that, as the Appellants became more and more immersed in the Dog Activities, Mr. Schroeder accepted that he had decided on a particular course of action, and he was determined “to stay with the program”, even though he had already spent a lot of money, and the prospect of recovering it was uncertain.
[164] As events unfolded, Burton did not become the number 1 dog at Westminster. Rather, Burton finished as number 2, which, nevertheless, was still a significant accomplishment, and which meant that there was a demand for Burton’s semen. Although the owners of other Rottweilers sold their dogs’ semen extensively, and realized significant revenue, the Appellants held to their highly selective and discriminating breeding strategy. Consequently, by the end of 2019, the Appellants had bred Burton only ten times. During the taxation years in issue, the revenue from breeding Burton was only US$10,500.
[165] The Appellants’ decision to breed Burton selectively, and on a limited basis, runs counter to Mr. Schroeder’s statement (as quoted above) that success at Westminster would lead to “the brass ring” and “the big breeding money”. Not to go after “the big breeding money” does not seem to be consistent with objective standards of businesslike behaviour.
[166] Eventually, in or about 2010, the Appellants changed course. Their focus shifted, from raising and showing dogs and selling puppies, to concentrating primarily on semen sales. In March 2024, Ms. Boles stated that the Appellants had an inventory of 50 to 75 units of frozen semen, which they continued to sell as opportunities became available. Most of the semen is Burton’s; its then current price was US$5,000 per unit. When testifying in March 2024, Ms. Boles stated that she would soon raise the price to US$6,000 per unit.
[167] The Appellants purchased a few units of the semen of Jake, who was the sire of Paris and whose semen was also in demand, because he (like the Ravenscrest dogs) did not have a predominant‑sire pedigree. The Appellants are holding that semen for sale, as well. The selling price will be in the range of US$7,500 to US$10,000 per unit. However, at the time of the trial, none of those units had been sold.
[168] When Ms. Boles testified in March 2024, she stated that she had a confirmed sale of Kobe’s semen for later this year, at a price of US$7,500, and that she might also have another sale sometime this year, as well.
[169] Ms. Boles produced a Statement of Business and Professional Activities, which indicated that a profit from the sale of semen was realized in 2020‑2022. However, during the cross‑examination of Ms. Boles, it came out that the calculation of the so‑called profit did not take all relevant expenses into consideration. The Appellants’ 2022 Statement of Business and Professional Activities indicated gross sales of $17,374.23, expenses for semen storage of $1,086.71, and net income of $16,287. Ms. Boles testified that Blue, one of the Appellant’s dogs, was shown in 2022 but that the Appellants did not claim any expenses for showing or handling Blue that year. In 2020 and 2021, the Appellants did not include any expenses, despite Ms. Boles testifying that they incurred approximately one thousand dollars in semen storage expenses in each of those years.
[170] The Appellants’ projection of a so‑called profit that is not computed by reference to all of the relevant expenses might be similar to the tactic of the appellant in the Huber case, from which Justice Miller quoted in the Savage case. Justice McArthur, who was the trial judge in Huber, stated that “the appellant’s attempts to create a profit in 1992 by drastically reducing expenses are suspect….”
[171] As noted above, the taxation years that are in issue in these Appeals are 2004 through 2010 inclusive. Therefore, the improving financial results in 2020 do not have a determinative effect on the Appeals in respective of the 2004‑2010 taxation years.
(d) Capability of Venture to Show a Profit
[172] The Appellants started engaging in the Dog Activities with the understanding that it involved great risk, but the potential for great profit. The Crown argues that the Dog Activities were a gamble, and that it would take significant luck to have a dog ranked in the top ten or twenty in the US.
[173] Ms. Sumner, the Appellant’s expert witness, testified that:
[T]he income earning potential on a dog business is totally dependent upon the recognition of the breeder, owner or handler …. Some people go their career barely scraping by, however others become recognized and successful based on their breeding decisions and their level of success in the show ring. The income earning potential really has no limit for those who are well-known, recognized and well connected. I’ve known personally of several dogs being owned by syndicates of ownership who have purchased shares of certain dogs upwards of six figures with the potential of recouping their investment from breeding fees and the sales of offspring of these particular dogs.
[174] Ms. Sumner testified, “starting with a strong foundation of breeding stock” was a critical component of a financially successful purebred dog business. Ms. Boles spent a significant amount of time researching to ensure that she selected a strong foundation pair for the Dog Activities and to ensure that they did not have a predominant sire problem.
[175] On cross-examination, Ms. Sumner agreed that other factors could also contribute to the financial success of a purebred dog business, including whether the business was run in a commercial manner, but confirmed, “in most cases it takes several years to develop a sound and successful breeding program”. Thus, it is possible to have a profitable purebred dog business; however, to be profitable, the business must be run in a commercially reasonable manner. This factor suggests that the Dog Activities may have been a business.
(4) Summary and Decision
[176] After weighing and balancing the above factors, particularly:
the consistent string of large losses over many years,
the use of credit‑card financing,
the rudimentary budgeting procedures;
the loose management of expenses;
the lack of a separate ledger for the Dog Activities and the unsophisticated books and records,
the restrictive marketing approach, and
Ms. Sumner’s opinion (see paragraph 120 above),
I have concluded that the Dog Activities were not a source of income for Ms. Boles in 2008, 2009 and 2010, and for Mr. Schroeder in 2009 and 2010. By reason of subsection 152(4) of the ITA, the Minister is precluded from reassessing Ms. Boles for 2006 and 2007, and Mr. Schroeder for 2004 through 2008, in respect of the source of income issue.
C. Rental Properties
(1) Personal Endeavour
[177] As indicated above, the first stage of the Stewart approach requires a court to determine whether the particular activity of the taxpayer is “undertaken in pursuit of profit, or is … a personal endeavour”. If a court determines that a particular activity might possibly be a personal endeavour or might possibly have a personal or hobby element, the court, in considering the source question, is required to “focus on the activity itself” and to analyze the commerciality of the activity.
[178] The Rental Properties were outfitted for seasonal occupation. Each spring, the Appellants travelled to Okanagan Falls to make the change‑over from winter occupation to summer occupation. For instance, they undertook major cleaning, power-washed the exterior walls and driveway, cleaned or replaced furniture and carpets, repainted or re‑stained various surfaces, restocked their inventory of linens, kitchenware, amenities, etc., took the deck furniture out of winter storage, did spring clean‑up in the yard and other spring‑related work. Each fall, the Appellants travelled to Okanagan Falls to make the change‑over from summer occupation to winter occupation. This entailed repeating or reversing the spring activities, as the case may have been. The process took about two weeks. While the Appellants were in Okanagan Falls on those occasions, they sometimes stayed in one of the Rental Properties.
[179] The Appellants testified that they did not travel to Okanagan Falls for recreational or personal purposes. They went there only to work on the Rental Properties. The only personal items that they left behind in the Rental Properties, when they returned to Vancouver, were boots to wear when the yard was muddy.
[180] Ms. Boles stated that she does not enjoy hot weather, and that she found the climate in the Okanagan Valley to be too hot for her comfort. Mr. Schroeder stated that he had little time for hobbies, and that his main hobbies were reading, golf, painting and running. Mr. Schroeder said that he would like to pursue fishing in his retirement, and that he had fished for bass on a small lake south of Skaha Lake. He also stated that he had not had time to go fishing on the lakes in the Okanagan. Both Ms. Wobick and Ms. Boles said that, when the Appellants went to Okanagan Falls to work on the Rental Properties, they sometimes stayed with Ms. Wobick.
[181] Given that the Rental Properties were residential properties and were sometimes available for occupation by the Appellants (depending on the state of any renovations that were under way at a particular time), and given that the Appellants sometimes stayed in the Rental Properties, while working there, there was a personal element.
[182] However, as indicated in paragraph 63 of Stewart, even if a taxpayer has made use of a rental property for his or her personal benefit, the taxpayer has “the opportunity to establish that his or her predominant intention was to make a profit from the activity and that the activity was carried out in accordance with objective standards of businesslike behaviour.”
[183] Accordingly, I will proceed to consider whether the Appellants’ predominant intention was to make a profit from the Rental Properties and whether the rental‑property activities were carried out in accordance with objective standards of businesslike behaviour. In conducting that analysis, whether a reasonable expectation of profit existed is a factor that may be taken into consideration.
(2) Intention
[184] It seems that the Appellants’ intention with the Rental Properties was to make a profit. As described above, the Appellants have a demonstrated history of diversifying their sources of income. The Appellants seem to have viewed the Rental Properties as an additional source of income. The Appellants decided to rent 434 Panorama on a short-term basis because they believed that they could charge $2,500 for a week’s rent. The Appellants chose to purchase 436 Panorama because they thought that it was more ideal for renters than 434 Panorama and because they believed that there would be benefits to owning two adjacent properties. Overall, in my view, the Appellants’ subjective intention in purchasing the Rental Properties was to diversify their sources of income and make a profit.
(3) Commerciality — Objective Standards of Businesslike Behaviour
(a) Profit and Loss Experience
[185] Based on the statements of Real Estate Rentals (Form T776), Ms. Boles reported $2,850, $1,250, $1,250, $1,250, and $2,500 in gross rental income, and $12,590, $9,021, $18,043, $18,043, and $11,402 in losses from the Rental Properties from 2006 to 2010, respectively. Thus, Ms. Boles reported total rental income of $9,100 and total losses of $69,099 from the Rental Properties from 2006 to 2010. These losses might point towards a lack of commerciality.
[186] Considering the gross income generated from the Rental Properties and the price the Appellants charged for a week’s rental, it appears that the Rental Properties were rented for a maximum of nine weeks, between 2006 and 2010. However, the Appellants had a persuasive explanation for why the Rental Properties were vacant for many years, as discussed further below. During the years in issue, the value of the US dollar decreased, which made Americans less inclined to rent the Rental Properties. Additionally, there were wildfires in the area, during some of the years in issue. Finally, the Appellants faced unexpected challenges in renovating 436 Panorama, such as rotting siding that they needed to replace. The Appellants could not find the necessary skilled trades workers in the area, and ultimately hired skilled trades workers from Vancouver. At times, the Appellants housed these workers at 434 Panorama.
(b) Training
[187] Ms. Boles had obtained training, particularly through her own experience, in acquiring, renovating and managing previous rental properties.
[188] In 1994, Ms. Boles acquired a broken‑down three‑story house, located at 2247 West 7th Avenue, in the Kitsilano area of Vancouver. She moved into the house, and began to fix up one of the levels. When that level was habitable, she rented it to a tenant. Ms. Boles moved to another level, fixed it up over time, and then rented that level to a tenant. Ms. Boles moved to the third level, and repeated the process.
[189] In 1996, Ms. Boles, together with three other women, purchased a residential property in Oliver, British Columbia. They renovated that house, and then leased it to a tenant. They hired Ms. Wobick to supervise the property, arrange for trades and yard maintenance, inspect the property as required, and collect the rent. Ms. Boles experience with property rentals suggests that the Rental Properties were a source of income.
(c) Intended (and Actual) Course of Action
(i) Business Plan and Goals
[190] Ms. Boles acknowledged that Mr. Schroeder and she did not have a formal written business plan in respect of the Rental Properties. However, he asserted that they had a verbal plan, which included renting 434 Panorama and 436 Panorama on a short-term basis. Ms. Boles stated that the Appellants’ initial plan for 436 Panorama was to turn it into a two-unit rental if possible, or if that was not possible, into a family rental. Ms. Boles also stated that the Appellants thought that having the two properties next to each other might be attractive for “big rentals, weddings, things like that”.
[191] As indicated above (in the context of the Dog Activities), the necessity of having a person’s business plan written down might not be as critical in the case of a sole proprietorship or a small husband‑wife partnership, as in the case of a larger entity. In other words, the Appellants’ verbal plan may have been adequate and sufficient for them.
[192] Consequently, given that the Appellants had a verbal business plan in respect of the Rental Properties, I do not consider the lack of a written plan to indicate that they did not display businesslike behaviour.
[193] The Appellants got short‑term rental insurance on the Properties, which was more expensive than long‑term rental insurance or non‑rental property insurance. Ms. Wobick maintained the Properties, cleaned the Properties between guest visits, provided the keys to guests, and made gift baskets for guests. The Appellants left a guest book at the Properties where renters could write their comments about their experience at the Properties, and suggest how the Appellants could improve the Properties for future renters. The Appellants kept many beds, pots and pans, three sets of sheets, and towels at the Properties. This suggests that the Appellants’ plan was to rent out the properties on a short‑term basis.
[194] One of the goals of the Appellants was to attract repeat renters. To this end, as noted above, the Appellants always used a guest book to obtain feedback and suggestions from renters. The Appellants implemented many of those suggestions. The Appellants’ business plan and goals points towards the Rental Properties being a source of income.
(ii) Financing
[195] As noted above, in Stewart, Justices Iacobucci and Bastarache said that the fact that an activity has been financed externally is an indication that the taxpayer is operating his or her activity in a businesslike manner. Consequently, the existence of financing adds to the commerciality of a venture, and operates in favor of characterizing the activity as a source of income.
[196] The Appellants used external mortgage financing to enable them to purchase each of the Rental Properties. In particular, when they purchased 436 Panorama, in order to borrow the requisite funds from HSBC, they needed to remortgage 434 Panorama, as well as putting a mortgage on 436 Panorama. On the loan application form that they submitted to HSBC, they stated that the property to be mortgaged was intended to be a rental property.
[197] When the cost of the renovations at 436 Panorama went way over budget, the Appellants were in great need of funds to complete the renovations. Mr. Schroeder redeemed money from his RRSP and other savings, Ms. Boles borrowed against her life insurance policy, and they remortgaged the property.
[198] In summary, the Appellants’ use of external mortgage financing in respect of the Rental Properties increased the commerciality of the rental‑property activities. Insofar as the use of financing was concerned, the Appellants operated the rental‑property activities in a businesslike manner.
(iii) Budgeting and Expense Management
(1) Budgeting
[199] After the Appellants had decided to acquire an investment property, they conducted a considerable amount of research, before selecting the Okanagan area. They were looking for a year‑round short‑term rental situation. Their purchase‑price budget was $200,000, and their post‑acquisition renovation budget was a lesser unquantified amount. As Ms. Boles explained, they “would need … likely a small budget to do some … largely cosmetic … things[:]…. updating carpeting, painting, lino, that kind of stuff.”
[200] Ultimately, they selected 434 Panorama because it had a nice view, the price was good, and Ms. Boles’ mother (who would be looking after the property) lived about a 20‑minute drive away. The Appellants paid $220,000 for 434 Panorama, which slightly exceeded their purchase‑price budget. As there was no indication that they had budgeted a specific amount for renovating that property, I cannot say whether they stayed within that budget or not.
[201] With respect to 436 Panorama, there was no indication as to whether they had budgeted a particular acquisition amount. However, that is not inconsistent with objective standards of businesslike behaviour, given that the owner of that property had approached the Appellants and had asked them whether they would like to purchase it.
[202] It was only after the Appellants had acquired 436 Panorama that they discovered that it would require significant renovations. It is arguable that, if they had applied objective standards of businesslike behaviour, they would have arranged for a pre‑acquisition inspection of the property before they agreed to buy it. However, it is important to be mindful of the direction given by the Supreme Court in Stewart, to the effect that, in conducting a source‑of‑income assessment, a court is to evaluate the commercial nature of the taxpayer’s activity, and not his or her business acumen.
[203] Upon discovering that 436 Panorama needed to be renovated, the Appellants budgeted $50,000 for those renovations. Due to unforeseen, but (with hindsight) explainable and understandable, circumstances, the cost of the renovations ultimately amounted to $300,000. Many businesses, when undertaking a construction project, encounter cost overruns. Therefore, I do not consider the Appellants’ experience in this regard to have been inconsistent with objective standards of businesslike behaviour.
(2) Expense Management
[204] When outfitting the Rental Properties, the Appellants shopped frugally for furniture and furnishings. For instance, they purchased floor models or mismatched mattresses and box springs. However, they did not compromise on quality. Ms. Boles said that she purchased warranties on the appliances, and “scotch‑guarded” the upholstered furniture, practices which she did not do in respect of the appliances and furniture in her own home.
[205] When the Appellants acquired 434 Panorama, and later 436 Panorama, they initially enlisted Ms. Boles’ mother, Doris Wobick, and her common‑law partner, Art Quevillon, to assist with the management and maintenance of the properties. The method of compensating Ms. Wobick and Mr. Quevillon for their services was rather loose. Although Ms. Wobick and Mr. Quevillon kept track of the hours that they worked on, or in respect of, the Rental Properties, they did not charge by the hour. Rather, from time to time, they had a discussion with the Appellants, and the four of them agreed on a round number as the amount of the compensation for the services in question. During her testimony, Ms. Wobick stated that sometimes she received cash as compensation; other times she received trips in exchange for her services.
[206] Engaging hired help in respect of a rental property is in keeping with objective standards of businesslike behaviour. However, remunerating the hired helper with a combination of cash and trips, the amount or value of which is not related, in accordance with some previously agreed-upon rate, to the amount or value of the services, is, in my view, not necessarily consistent with objective standards of businesslike behaviour.
(iv) Risk Management
[207] The Appellants insured 434 Panorama and 436 Panorama as short-term rental properties, which was more expensive than the insurance for long-term rental properties and non-rental properties. For 2024, Ms. Boles testified that the short-term rental insurance premium, with Intact Insurance, for 436 Panorama was $8,200, but would have been $6,000 for long-term rental insurance.
[208] Before purchasing 436 Panorama, in 2005, the Appellants insisted that its former owner, who was elderly and in bad health, get legal and valuation advice, to ensure that there would be no question that he was paid a fair amount. Additionally, as part of their financing application, the Appellants had an appraisal done for 436 Panorama, which concluded that the market rent for a dwelling with a basement suite would be about $900 for the main level and $600 for the basement. Overall, the Appellants’ approach to managing risk associate with the Rental Properties is consistent with objective standards of businesslike behaviour.
(v) Advertising and Marketing
[209] The Appellants advertised the Rental Properties regularly, on a variety of web sites and through other means (such as triathlon organizers). They also observed what their competitors (such as a neighboring bed & breakfast at 432 Panorama Crescent) were doing.
[210] During the 2004‑2010 taxation years, the Appellants used VRBO, Rentola, Ideal Vacation Rentals, Craigslist and Kijiji to advertise the Rental Properties.
[211] In 2013, the Appellants began to use Airbnb to advertise the Rental Properties. As will be discussed below, the use of Airbnb produced significant benefits. The Appellants’ use of online platforms to advertise the Rental Properties suggests that the Rental Properties may have been a source of income.
(vi) Record Keeping
[212] It appears that Ms. Boles kept most (if not all) of the receipts, invoices and similar documents relating to furniture, appliances, furnishings, supplies and other items purchased for the Rental Properties. Ms. Boles had a system for labelling each document (e.g., F = furnishings, S = supplies, R = renovations, etc.). On the other hand, Ms. Boles did not keep receipts and invoices relating to purchases for the home in which she lived.
[213] Many of the expenditures for the Rental Properties were paid through Ms. Boles’ law corporation. They were identified as pertaining to the Skaha property (or properties), and were treated as expenditures from Ms. Boles’ personal drawings account. Similarly, security deposits and rental payments were deposited into this account, and were so identified. Ms. Boles regularly got printouts for that account (using a software known as “PC Law”) and labelled all of the receipts and expenditures related to the Rental Properties. Ms. Boles used her legal assistant, Melinda Holbrook, to keep track of those items.
[214] Ms. Boles kept track of rental-property expenditures made by her personally (usually on her credit card, by cheque, or with cash) by using software known as “Quicken”. I understand that Quicken was also used to record rental‑property expenditures made by Mr. Schroeder.
[215] As noted above (in my discussion of the Dog Activities), Mr. Schroeder used his law office manager and bookkeeper, Kathy Hawley, to keep track of the receipts and expenditures that related to the Rental Properties and that were received or incurred by his law office. Mr. Schroeder and Ms. Hawley used his monthly VISA statements for this purpose. At the end of each year (or, eventually, more frequently), Mr. Schroeder went through the statements and marked the items that related to the Rental Properties. Ms. Hawley then compiled the working papers.[231]
[216] Ms. Boles and Mr. Schroeder each made their respective working papers available to the other. All four sets of accounting records were compiled annually.
[217] Having, during the course of the trial, seen and reviewed hundreds of receipts, invoices and the like, and having seen and reviewed a number of the PC Law printouts of the general ledger of Pamela S. Boles Law Corporation, it is my view that Ms. Boles had a system for keeping track of rental revenue and expenses, and that she kept adequate books and records in respect of the Rental Properties (although not the best that could have been kept, which she herself acknowledged).
[218] I am of the view that the expenditures that were reviewed during the trial and that were described as pertaining to the Rental Properties were actually made, and that, apart from the $1,000 donation made in 2007 and the US$3,000 cost of a watercolour painting, those expenditures were made or incurred for the purpose of gaining or producing income from the Rental Properties, and were not personal or living expenses.
[219] Accordingly, I am also of the view that Ms. Boles has demolished the assumptions set out in subparagraphs 15.ll) and 15.mm) of the Reply in the Boles Appeals, except insofar as those assumptions pertain to the above $1,000 donation and the painting.
(vii) Business Strategy
[220] The Appellants’ business strategy was to rent the Rental Properties on a short-term basis. Mr. Schroder testified that, after investigating, the Appellants discovered that there was a strong summer rental market in the area near 434 Panorama. The Appellants felt that people would be interested in renting 434 Panorama to attend the Okanagan wine festival, that takes place in early fall. The Appellants also knew that the area would be a good location for family summer vacations. Mr. Schroeder testified that when the Appellants purchased 434 Panorama, they thought that they could charge $2,500 for a week’s rental, which would generate about $20,000 in July and August alone, assuming that it was fully booked. Additionally, there was a popular hockey school near 434 Panorama, and the Appellants business strategy included renting 434 Panorama to people attending the hockey school from out-of-town. Mr. Schroeder testified that the Canadian dollar was worth about seventy-five U.S. cents at the time, which made the $2,500 a week rental price attractive to Americans.
[221] The Appellants initial plan for 436 Panorama was to turn it into a two-unit rental if possible, or if that was not possible, into a family rental. Ms. Boles stated that the Appellants thought that having the two Rental Properties next to each other might be attractive for “big rentals, weddings, things like that”.
[222] The Appellants’ strategy involved advertising the Rental Properties on various online platforms, as described above. More recently, the Appellants began renting 436 Panorama for longer periods of time.
(viii) Redirection, as Needed
[223] As noted above, in 2013, the Appellants began to use Airbnb to advertise the Rental Properties. The use of Airbnb gave the Rental Properties greater exposure, obviated the need to collect and later refund damage deposits, and made the collection of rent more certain and more convenient. From 2013 until March 2024, the Appellants’ rental revenue through Airbnb was approximately $126,000, and their rental revenue through VRBO was approximately $3,500. As well, during that period, they received rent through private rentals.
[224] As time passed, the Appellants made other changes, as well. For instance, they no longer relied on Ms. Boles’ mother, stepfather and brother to look after 436 Panorama. Rather, the Appellants eventually hired a professional housecleaner, a commercial laundry service, and a commercial lawn and yard maintenance service. The Appellants also streamlined their supply and payment systems.
[225] The Appellants always used a guest book to obtain feedback and suggestions from renters. Over the years, they implemented many of those suggestions. As noted above, the goal of the Appellants was to attract repeat renters, in part by taking their suggestions seriously.
[226] Over the course of the years, the Appellants made improvements to 436 Panorama on a regular basis. In particular, they arranged for a pergola and a retaining wall to be constructed in 2021.
[227] When the Appellants initially acquired 434 Panorama, and then 436 Panorama, they understood that short‑term rental prospects were very promising. In recent years, the Appellants changed direction, as longer‑term rental opportunities arose. In particular, in September 2023, neighbors living close to 436 Panorama undertook major renovations of their own home. Those renovations were projected to be so extensive that it was necessary for those neighbors to obtain alternate temporary accommodation. Accordingly, they made arrangements to rent 436 Panorama from the Appellants, commencing that month, at a rate of $4,500 per month. When Ms. Boles testified in March 2024, the neighbors were still renting 436 Panorama, and expected to continue to do so for several more months.
[228] The operational and physical improvements that the Appellants made to the Rental Properties over the years are consistent with objective standards of businesslike behaviour.
(d) Capability of Venture to Show a Profit
[229] As a result of the above multi‑month rental of 436 Panorama to nearby neighbors, and other longer‑term rentals that preceded it, the Appellants earned a profit from 436 Panorama in 2021, 2022 and 2023. In 2023, their gross rental revenue from 436 Panorama was almost $50,000, and their net profit was approximately $23,400.
[230] The recent financial results in respect of 436 Panorama are not conclusively determinative of the capability of the Rental Properties to show a profit in the 2004‑2010 taxation years. However, the fact that the rental of 436 Panorama has been profitable in recent years, at a minimum, suggests that the Rental Properties had the capability to show a profit in the 2006‑2010 taxation years.
(4) Summary and Decision
[231] Having reviewed, weighed and balanced the above factors, I am of the view that the Rental Properties were a source of income during the taxation years in issue.
[232] Subject to the comments that follow, I have also concluded that, apart from the $1,000 deduction made in 2007, the rental expenses deducted by the Appellants were reasonable in the circumstances, were made or incurred for the purpose of gaining or producing income, and were not personal or living expenses.
(5) Other Rental Concerns
[233] I have a few concerns about some of the expenditures deducted by the Appellants in computing their income from the Rental Properties.
(a) Disallowed Expenditures
[234] As discussed above, Mr. Schroeder said that, as best he remembers, he likely claimed a charitable gift tax credit in respect of the $1,000 donation made to Horn of Africa, and the Appellants deducted that amount as a rental expense. Given that the same expenditure cannot be used twice, I concur with the Minister that the deduction of the $1,000 donation is not a deductible expense in computing the Appellants’ income from the Rental Properties.
[235] On June 29, 2007, the Appellants paid US$3,000 to a vendor in Bend, Oregon for a watercolour painting. The Appellants confirmed that the painting did not relate to the Dog Activities, but they were not sure whether it was acquired for one of the Rental Properties. Given the uncertainty about the purpose for which the painting was acquired, I have concluded that its cost was not a deductible expense in computing the Appellants’ income from the Rental Properties. Furthermore, although I do not have much information about the painting or its use, it seems to me that it would likely be a capital property, or possibly inventory (if the Appellants purchased it for the purpose of resale) In any event, the Canadian equivalent of the US$3,000 expenditure was not a deductible expense.
(b) 2007, 2008 and 2009 Statements of Real Estate Rentals
[236] Subject to the beginning and end dates of the fiscal period in question, which appear in its upper left-hand corner, the Statement of Real Estate Rentals (Form T776) that Ms. Boles filed for 2009 is identical to the corresponding form that she filed for 2008. Furthermore, the gross rents (i.e., $1,250) and the total expenses (i.e., $19,293.25) reported on both of those forms are identical to the gross rents and the total expenses reported on the corresponding form for 2007. The exact replication of the 2007 amounts in the 2008 and 2009 forms calls into question the reliability of the 2008 and 2009 forms, particularly as the 2007 form related to 434 Panorama and the 2008 and 2009 forms related to 436 Panorama.
[237] Ms. Boles explained that, due to 436 Panorama being for sale for part of 2009, and due to significant wildfires in the area in 2009, which led to evacuations, their rental expenses were greater than usual. Accordingly, their accountant recommended that, for 2009, they not deduct rental expenses in excess of what they had deducted in 2008. While that may explain why the expenses that they deducted in 2009 were exactly the same as the expenses that they had deducted in 2008, it does not explain why the 2008 expenses were exactly the same as the 2007 expenses, especially when the 2007 form related to 434 Panorama and the 2008 form related to 436 Panorama. During cross-examination, Ms. Boles did not have an explanation, other than to say that she had discussed it with their accountant.
[238] In view of the foregoing, I do not have confidence in the expense amounts reported on the 2008 and 2009 Statements of Real Estate Rentals. However, the Appellants did own 436 Panorama in 2008 and 2009, and they would have paid interest on the mortgage, property taxes, utility charges and insurance premiums in respect of the property, even though there is no reliable evidence as to what the actual amounts of the expenses actually were. The total of the expenses claimed for each of those two years (as well as 2007) was $19,293.25. The total of the expenses paid in 2006 (in respect of 434 Panorama) was $28,030.87, and the total of the expenses paid in 2010 (in respect of 436 Panorama) was $25,304.32. Therefore, I am satisfied that the expenses deducted for 2008 and 2009 were within a reasonable range. Nevertheless, given the uncertainty in respect of the 2008 and 2009 amounts, I have decided to reduce both of those amounts from $19,293.25 to $19,000.00.
[239] On the 2006, 2007 and 2010 Statements of Real Estate Rentals, Ms. Boles was shown as a 50% owner of the applicable property, and she deducted 50% of the expenses. On the 2008 and 2009 Statements of Real Estate Rentals, Ms. Boles was shown as a 100% owner of 436 Panorama, and she deducted 100% of the expenses. Ms. Boles explained that in those two years she had paid the majority of the expenses associated with the property; therefore, her accountant advised her to deduct 100% of those expenses. She also stated that, due to serious health issues experienced by Mr. Schroeder in that timeframe, they had decided that he would transfer his interest in 436 Panorama to her, which is why she showed herself as a 100% owner in 2008 and 2009. However, that transfer was not implemented, and, for 2010, she went back to showing herself as a 50% owner.
[240] As Ms. Boles was only a 50% owner of 436 Panorama in 2008 and 2009, she was entitled to deduct only 50% of the losses incurred in those two years. Therefore, the amounts that may be deducted by Ms. Boles in respect of 436 Panorama are $9,500 for 2008 and $9,500 for 2009.
(c) Interest Expense
[241] One of the Minister’s concerns was that the most significant expense incurred by the Appellants over the years in respect of the Rental Properties was interest on the mortgage or mortgages encumbering those properties. To address that concern, I need say nothing more than to point out that in both Ludco and Stewart, the Supreme Court stated that subparagraph 20(1)(c)(i) of the ITA does not require a taxpayer to earn a net profit in order for interest to be deductible. I will, however, add that in Stewart, like the present Appeals, “the taxpayer’s interest payments exceeded his rental income for the years in question.”
VII. PENALTIES
[242] Applying subsection 162(2) of the ITA, the Minister assessed a repeated-failure-to-file penalty payable by Ms. Boles for 2008. Applying subsection 162(1) of the ITA, the Minister assessed a failure-to-file penalty payable by Ms. Boles for 2009. In this regard, in reassessing Ms. Boles, the Minister assumed the following facts, as set out in subparagraphs 15.nn) through 15.ss) of the Boles Reply:
nn) the Appellant’s 2005 income tax return was due to be filed by June 15, 2006;
oo) the Appellant filed her 2005 income tax return on August 29, 2008;
pp) the Appellant’s 2008 income tax return was due to be filed by June 15, 2009;
qq) the Appellant filed her 2008 income tax return on December 31, 2010;
rr) the Appellant’s 2009 income tax return was due to be filed by June 15, 2010;
ss) the Appellant filed her 2009 income tax return on December 31, 2010.
[243] During cross-examination, Ms. Boles admitted, through her counsel, that she filed her 2005 income tax return on August 29, 2008, her 2008 income tax return on December 31, 2010, and her 2009 income tax return on December 31, 2010.
[244] Applying subsection 162(2) of the ITA, the Minister assessed a repeated-failure-to-file penalty payable by Mr. Schroeder for 2004. In this regard, in reassessing Mr. Schroeder, the Minister assumed the following facts, as set out in subparagraphs 14.hh) through 14.kk) of the Schroeder Reply:
hh) the Appellant’s 2002 income tax return was due to be filed by June 15, 2003;
ii) the Appellant late-filed his 2002 income tax return on August 5, 2003;
jj) the Appellant’s 2004 income tax return was due to be filed by June 15, 2005;
kk) the Appellant late-filed his 2004 income tax return on June 15, 2006;
[245] During cross-examination, Mr. Schroeder admitted that he filed his 2002 income tax return on August 5, 2003, and his 2004 income tax return on June 15, 2006.
[246] Dealing first with the 2009 failure-to-file penalty assessed under subsection 162(1), in respect of Ms. Boles, her admission that her 2009 income tax return was filed late satisfies the requirements of that subsection. Therefore, the 2009 failure-to-file penalty was properly assessed.
[247] Turning to the repeated-failure-to-file penalties, subsection 162(2) of the ITA, in English, sets out three conditions that must be satisfied before a repeated-failure-to file penalty may be assessed in respect of a particular person. Those conditions are:
the person must fail to file a return of income for a taxation year, as and when required by subsection 150(1) of the ITA;
a demand for a return for the year must have been sent to the person under subsection 150(2) of the ITA; and
the person must, before the time of failure, have been liable for a penalty for a failure to file on time or for a repeated failure to file on time in respect of an income tax return for any of the three preceding taxation years.
[248] By reason of the above admissions by the Appellants, it is clear that the first of the above conditions has been satisfied. Specifically, Ms. Boles failed to file her 2008 return, and Mr. Schroeder failed to file his 2004 return, on or before the respective filing deadlines.
[249] The Crown has not addressed the second condition set out above. There is no evidence as to whether a demand for Ms. Boles’ 2008 return, or for Mr. Schroeder’s 2004 return, had been sent to them under subsection 150(2) of the ITA.
[250] Not only was there no evidence concerning the sending of the demands, but it appears that, when assessing the penalties, the Minister did not assume (and the Crown did not plead) that the demands had been sent.
[251] In Bailey, Justice V.A. Miller confirmed that, when a taxpayer challenges a repeated-failure-to-file penalty, in order to satisfy the condition set out in paragraph 162(2)(b), the Crown needs to provide evidence that a demand for a return was mailed or otherwise sent by the CRA to the taxpayer.
[252] By reason of the above returns being filed late, a penalty under subsection 162(1) of the ITA may have been payable by Ms. Boles in respect of her 2005 return, and by Mr. Schroeder in respect of his 2002 return, which would satisfy the third condition set out above.
[253] However, the Wichartz case confirms that, while the ITA creates a liability for a failure-to-file penalty at the time of the failure, the penalty becomes payable by reason of an assessment. The Crown did not provide evidence that the Minister had assessed a failure-to-file penalty payable by Ms. Boles for 2005, or that the Minister had assessed a failure-to-file penalty payable by Mr. Schroeder for 2002.
[254] As noted in a footnote above, in Hughes, Justice Jorré determined that, by reason of the French version of subsection 162(2), there is a fourth condition, which he stated as follows:
The person must have failed to file his[/her] return within the reasonable period set out in the demand [sent to the person under subsection 150(2)].
[255] Concerning the evidentiary issue before the Court in Hughes, in the context of subsection 162(2)’s fourth condition, Justice Jorré stated:
74 Has the taxpayer filed within the time period stipulated in the demand? The Respondent submits that there is no evidence that the Appellant complied with the deadline contained in the demand and there is no evidence that the Appellant requested or received an extension of time to comply with the demand.
75 However, given that the Respondent did not plead that it made an assumption or finding of fact that the Appellant failed to comply with the time limit in the demand, there was no onus on the Appellant to prove that he did. It was for the Minister to demonstrate that this requirement of the penalty was met….
78 It follows that it has not been demonstrated that the preconditions to the application of subsection 162(2) have been met and, accordingly, the appeal must be allowed.
[256] By reason of the foregoing analysis, I have determined that the Appellants are not liable for the repeated-failure-to-file penalties that were assessed under subsection 162(2) of the ITA.
VIII. CONCLUSION
[257] The Boles Appeals are allowed, and the Boles Reassessments are referred back to the Minister for reconsideration and reassessment on the basis that:
The Minister is precluded, by reason of subsection 152(4) of the ITA, from reassessing the tax payable by Ms. Boles for 2006 and 2007, except in respect of her portion of the personal or living expenses and the unreasonable expenses listed in Schedule C.
Subject to subparagraph c below, and apart from the $1,000 donation made in 2007 and the US$3,000 cost of a watercolour painting, as described above and in Schedule C, the rental expenses deducted by the Appellants in respect of the Rental Properties were reasonable in the circumstances, were made or incurred for the purpose of gaining or producing income, and were not personal or living expenses, with the result that Ms. Boles’ share (not exceeding 50%) of those expenses is deductible in computing her income for 2008, 2009 and 2010.
For greater certainty, the amount of the rental loss incurred by the Appellants in each of 2008 and 2009 is limited to $19,000, with the result that the amount of the rental loss deductible by Ms. Boles for each of 2008 and 2009 is limited to $9,500.
Ms. Boles is not liable for the repeated-failure-to-file penalty under subsection 162(2) of the ITA in respect of 2008.
[258] The Schroeder Appeals are allowed, and the Schroeder Reassessments are referred back to the Minister for reconsideration and reassessment on the basis that:
The Minister is precluded, by reason of subsection 152(4) of the ITA, from reassessing the tax payable by Mr. Schroeder for 2004 through 2008 inclusive, except in respect of his portion of the personal or living expenses and the unreasonable expenses listed in Schedule C.
Mr. Schroeder is not liable for a repeated-failure-to-file penalty under subsection 162(2) of the ITA in respect of 2004.
[259] For greater certainty:
the Dog Activities were not a source of income for Ms. Boles in 2008, 2009 and 2010, and for Mr. Schroeder in 2009 and 2010; and
the failure-to-file penalty under subsection 161(1) of the ITA in respect of 2009 is properly payable by Ms. Boles.
[260] As success is divided, I am not inclined to award costs to, or against, either party.
Signed at Ottawa, Canada, this 20th day of December 2024.
“Don R. Sommerfeldt”
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