Edwardes v. The Queen, 91 DTC 5635, [1991] 2 CTC 269 (FCTD)

MacKay, J.: —In this action the plaintiff, Mary Edwardes, appeals, pursuant to subsection 172(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the 'Act") as that section applied at the relevant time, from a decision of the Tax Court of Canada, (Unreported, Tax Court file 86-1398 (IT), June 24, 1988, per Bonner, T.C.J.). That Court had dismissed the plaintiff's appeals from reassessments of income tax by the Minister of National Revenue which disallowed deductions from income of losses claimed as losses from a business for the 1982 and 1983 taxation years.

In her income tax returns for each of those years, the plaintiff sought to deduct business losses in excess of $19,000 resulting from her activities in automobile performance rallying. The reassessments by the Minister were based on the determination that in those two years there did not exist a reasonable expectation of profit in those activities and thus the losses could not be said to arise from a business.

While the action concerns the application of section 3 (income for taxation year), subsections 9(1) and (2) (income, or loss, from business or property) and 248(1), it depends in particular upon paragraphs 18(1)(a) and 18(1)(h) of the Act as in force for the taxation years in question which provided:

18. (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) an outlay or expense except to the extent that it was made or incurred for the purpose of gaining or producing income from the business or property;

(h) personal or living expenses of the taxpayer except travelling expenses (including the entire amount expended for meals and lodging) incurred by the taxpayer while away from home in the course of carrying on his business;

The decision of the Minister giving rise to appeals by the plaintiff determined that the expenses claimed as deductions were not incurred by the taxpayer for the purpose of gaining or producing an income from a business within the meaning of paragraph 18(1)(a) and subsection 248(1) of the Act but were personal or living expenses of the plaintiff within paragraph 18(1)(h).

No definition of "business" is included within the Income Tax Act. Mr. Justice Dickson (as he then was), speaking for the Supreme Court of Canada in Moldowan v. The Queen, [1978] 1 S.C.R. 480; [1977] C.T.C. 310, at 313-314; 77 D.T.C. 5213; 15 N.R. 476; 77 D.L.R. (3d) 112, stated in part:

. . . it is now accepted that in order to have a “source of income”, the taxpayer must have a profit or a reasonable expectation of profit. Source of income, thus, is an equivalent term to business .. . .

There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer's training, the taxpayer's intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive. The factors will differ with the nature and extent of the undertaking . . .

While Moldowan was concerned with farming operations and claimed farm losses, the principle there set out by Mr. Justice Dickson has since been given wide application in other factual settings. Counsel for the parties here agreed that the test of Moldowan is here applicable, requiring an objective determination, based on all relevant facts, of the existence of a reasonable expectation of profit on the part of the taxpayer. If that expectation be found, the loss here claimed by the plaintiff is an allowable deduction from income from a business under the Act.

Factual background

For some years until 1985, the plaintiff lived in Fonthill, Ontario and was employed as a full-time teacher by the Niagara South Board of Education. She began to participate in automobile rallies in 1975, entering navigational rallies as a co-driver with her then teenage son, a pastime in which the two were engaged on a recreational basis. That sport requires following a described course, largely on public roads, within posted speed limits and meeting prescribed times for passing various check points along the route. It is a recreational activity, with no special requirements for vehicles or drivers. The role of a co-driver is mainly navigational, directing the driver about the route and monitoring speed and elapsed time.

Commencing in 1979 and until 1985 the plaintiff participated in performance rallies. These tend to be organized in this country by local clubs with a schedule of national events under the aegis of the Canadian Automobile Sport Clubs (C.A.S.C.) and they differ significantly from navigational rallies. Performance rallies involve routes laid out on closed roads, generally in remote areas, often logging and other rough roads closed to traffic for the occasion. On these routes various legs are set out for speed/timed driving, with intervals between them and the objective is to complete the speed legs in the shortest possible time. In this event the co-driver's task is to provide navigational assistance and to be able in case of emergency to take over the driving responsibilities. It requires a specialized training course for drivers, a course the plaintiff completed. The event also required a high performance vehicle, a stock car with special adaptations for driving on remote rough roads, a high performance engine and special safety features such as a full roll-cage.

The plaintiff acquired a high performance automobile and entered performance rallies with her son as driver until 1980 when he left rallying. In addition to the automobile, a modified Toyota, the plaintiff also had, in the years in question, a trailer to move the performance car and a van for the team to travel in, as well as tools, spare parts and tires essential for participation in performance rallies. In the years in question the plaintiff, with a driver and her performance car, participated in a variety of rallies under C.A.S.C. sanction at various locations from Nova Scotia to British Columbia, and occasionally in rallies in the United States.

Influenced by others engaged in the sport, and with her own record of success developing, the plaintiff commenced in 1981 to treat her involvement in performance rallying as a small business venture. She used the name Revolution Rally Team to identify her business in rallying and the team comprised her father, herself, and her son or other driver as "partners" in the venture. She kept records of expenses and revenues arising from her involvement; she attended a C.A.S.C.-sponsored seminar in 1981 on measures to attract sponsors who might be enticed to provide financial support for performance rallying, particularly those involved or interested in the automobile industry. Later she attended a seminar of the Ontario Teachers’ Federation on the organization of small business ventures.

The plaintiff's testimony at trial was that in 1981 she participated in 10 or 11 rallies across Canada and at the end of the season she was ranked second among women drivers and seventh overall among co-drivers. That year she and the driver with her, who was employed by the owner-driver of a team sponsored by the Toyota company, had an arrangement to drive the Toyota team’s back up car at races in western Canada and to use her car as a back up car for the Toyota team at races in eastern Canada. In fact, the plaintiff and her driver drove the Toyota team's back up car in only one race, and drove another sponsored car in other races in western Canada. Her own car was entered in only one race in eastern Canada before it was crashed and had to be abandoned. In September of that year she obtained a replacement car, paying $10,000 for a completely rebuilt high performance car.

In 1982 she continued participation in performance rallying with the same driver as in the previous year and using her vehicle in seven rallies in Canada and one in the United States. Again she was rated second among women drivers.

In 1983 Ms. Edwardes participated in five national events and one in the United States. She continued as co-driver, with two other drivers, and using her car. In the following year, 1984, with a driver she referred to as a very competitive driver, she had her most successful year in terms of performance. After participating in six national events and one regional rally, at the end of the season, her driver was ranked the top driver in the country, she ranked first among lady drivers and number one among co-drivers, and their team was ranked as national champions for the open class. That standing was a key element in her plans for her business venture.

However, in the following year, after participating in two performance rallies as manager of a trial all-women's team, she withdrew from active participation in rallying in the spring of 1985 and the plaintiff married and moved to L’Orignal, Ontario. She had apparently not used her car in performance rallies that year and before the season was over, the car and any spare parts were sold.

Ms. Edwardes described her business operations and plans in the 1981-85 period. The key element in her planning was to seek a major sponsor with sufficient support to meet expenses of performance rallying and the costs of preparing ana maintaining a nigh performance car for consistent winning in the rallies. While a major sponsor was not seen as essential in the long term, it was a key to establishing the enterprise quickly. Ultimately it was perceived that, since high standing in the sport was unlikely to be attained over more than a few years, the business venture should ultimately include a garage where her own car could be maintained and which could serve either as a do- it-yourself centre for other performance rally cars or for stock cars, or as a service centre providing maintenance and repair for such automobiles. In 1982 and in 1984 some buildings in the area near Fonthill were considered in a preliminary way as possible sites for such a centre, but without a major sponsor and with very limited resources the matter was not further followed up.

In 1983 the plaintiff made proposals, apparently in writing to Amzoil, a supplier of automotive fluids and lubricants, and by telephone conversations and a written proposal to Volkswagen Canada, for their consideration as possible major sponsors. Ms. Edwardes described these proposals as seeking committed funding at a level of $70,000 to $100,000 per annum from which it was hoped that a salary could be paid to an outstanding driver who would also maintain the team's car and service others, that expenses for national events could be met and that a modest profit on operations would be returned to the plaintiff. Neither Amzoil nor Volkswagen proved to be interested in the proposals made to them. In the fall of 1983 a two sided brochure about the team was printed and sent to a number of firms as an initial introduction, in hopes that follow-up meetings would lead to contracts for major or other sponsors. These were sent to firms interested in and supportive of the automobile industry or of automobile rallying, and other firms which it was thought might be interested in supporting the venture featuring a highly successful woman in an unusual sport. In the spring of 1984 the plaintiff's son, on her behalf, submitted proposals to Toyota Canada and to B.F. Goodrich for major sponsorship of the venture, seeking support in the range of $30,000 to $100,000. Again, neither company proved to be interested, Goodrich indicating it would assume no further sponsoring commitments in that year, and Toyota indicating before the end of the year that it was withdrawing support that it had earlier provided for performance car rallies. The plaintiff testified that substantial time had been devoted to seeking sponsors, but there was no testimony or other evidence of any success from these efforts despite the plaintiff's success as a participant in performance rallies. She did acknowledge that she had received strong local sponsorship support in the form of reduced costs of major servicing and some products required for her participation in performance rallying.

Following her marriage and move to L’Orignal in 1985 Ms. Edwardes and her husband surveyed the possibility of establishing in that area the sort of venture she had earlier hoped to establish in the Fonthill area. Apparently it was concluded that the prospects for so doing in the new location were not encouraging. It was then that the performance car, parts and tools were sold and the plaintiff ceased to consider further the business venture including her performance rally activities.

In cross-examination about her business plans for the venture, the plaintiff testified those had been developed in 1981 and were thereafter modified from time to time. It was said that all the written planning and correspondence about sponsorship proposals had been lost in moving from Fonthill in 1985. The plaintiff gave few details of plans for the venture, or of sponsorship proposals made to others, it seemed that the details were to depend upon arrangements that might be negotiated with prospective sponsors. She described the performance rally participation and the proposed garage operations as one business, perhaps ultimately two businesses, with interlocking operations. With major sponsorship for the rally participation that aspect would provide for a salary to a driver/maintenance manager to prepare and maintain the team’s car and to work on or oversee work on other cars. It was foreseen that it would take up to five years to attain top rankings, and recognition for performance, in rallying, and this was seen as the key to attracting sponsors.

While the plaintiff was queried in cross-examination about differences in testimony allegedly given in the Tax Court proceedings and in examination for discovery in advance of trial, no evidence of the differences was presented at trial. This Court must deal with the evidence presented at trial.

One other witness testified at trial, Mr. Walter Boyce, a businessman and accountant, who had been a very active participant, as a driver and operator of his own car, in performance rallying through the 19705. He was the Canadian champion at least six times, and North American and World Champion at least once. He had been highly successful in arranging for sponsorships of his rally team. From 1971-76 his team was sponsored by Toyota Canada and thereafter was sponsored by British Leyland.

Automobile performance rallying is not a sport with lucrative prize money or rewards. Success in driving may, or may not, lead to support from sponsors. Boyce obviously was successful in attracting support from car makers who initially provided monetary prizes for high performance by rally teams driving the makers' models usually owned by the rally team, and later by providing, as in the cases of Toyota and British Leyland, an annual lump sum payment for sponsorship. In the latter case, additional sponsorship was obtained from suppliers of parts and supplies for performance points by a team with major support from a car maker. In Boyce's experience, largely throughout the 1970s, some seven or eight car makers were known to be interested as major sponsors of performance rally teams.

Boyce indicated that a consistently winning record was the key to attracting a major sponsor. In his experience commitment by a major sponsor at the end of the 1970s was in the order of $50,000 per annum. With that commitment, a rally car owner-operator might contract to serve representational activities and attendances at promotional events, to prepare and deliver a car, generally his own, for rally events and to ensure participation with consistent high standing in a series of rallies and related events. Boyce emphasized that sponsorship depended upon the rally team, not just the driver, but the co-driver and others who ensured the performance car was properly prepared and maintained. It seemed evident from his testimony that personal qualities, an ability to present the sport and the rally team in a positive light reflecting well upon the sponsor would be a factor considered by a prospective sponsor. In cross-examination he did not agree that the driver was the key figure in attracting sponsors, rather it was the team and their vehicle that made sponsorship possible. He recalled two United States based teams where the owner-operator of the car was a codriver who had arranged for major sponsors. It was Boyce's view that the plaintiff's emphasis on establishing a record of success in performance rallies as a prelude to seeking sponsors to support the activities was a key in developing her business venture.

Through the years 1981 to 1985, when the plaintiff declared losses or profits from her activities in performance rallying, the following table summarizes her financial record.

In the final year, revenue was derived in the main from the sale of parts and tools and profit on sale of the plaintiff's rally car. Only in 1983 and 1984 was revenue from advertising indicated, and only in those two years and 1985 was revenue from cash awards indicated, in statements of “business” income and expenses filed by the plaintiff with her income tax returns.

The Minister did not disallow the loss claimed as a deduction from her income by the taxpayer for 1981, but by reassessments did disallow the losses claimed in 1982 and 1983 and it is only those reassessments that are at issue in this case. Up to the time of trial no reassessment was made by the Minister with respect to the loss claimed for 1984, or with respect to the plaintiff's tax return for 1985.

Submissions of the parties

For Ms. Edwardes it was argued that from 1981 her participation in the sport was not just a hobby or a pastime. She had obtained a special licence and maintained qualifications for it from year to year. She had attended seminars concerned with seeking sponsorship for her participation, and concerned with operating a small business. She maintained separate accounts for revenues and expenses in relation to rally participation. She had demonstrated a high level of commitment, and had devoted much time and effort, not merely in participation but in seeking sponsors and advertisers to support the venture. Vehicles, parts and supplies used for attendance at and participation in rallies were not used for personal reasons aside from rallying, except for use of the van when the plaintiff moved in 1985 to L’Orignal. Further, she had assumed substantial risk of possible losses, through damage to performance cars, one of which had been replaced following a crash in 1981, and further risk if sponsors were not persuaded to support the venture, a risk said to be best illustrated by a decision of Toyota Canada to withdraw from sponsorship of all teams in performance rallying in 1983, a risk that could hardly have been anticipated after their involvement, with others, for some years. Finally, it was urged that inability to realize the plan pursued by the plaintiff was through no fault of her own, but changes in personal circumstances, including relocation to eastern Ontario where there was apparently less interest in automobile sports events, and the difficulty in attracting sponsors. All these factors, it was said led to the sensible decision to withdraw from the business when it became clear it would not succeed.

For the defendant it was urged that while the plaintiff's planning for her business venture was posited on finding adequate sponsorship support, the first efforts to seek any major support were not initiated until late in 1983 and 1984. Those efforts when made were vaguely described so far as the details of proposals were concerned, and in the plaintiff's own words the details were all left to be negotiated with an interested prospective sponsor. Counsel also urged that a key factor in attracting sponsorship appeared to be presence on a rally team of a driver with a consistent record of success, but the evidence of Mr. Boyce was rather that the consistent success resulting from a team effort was more important than the driver's personal record. While I am persuaded by Boyce's testimony, the fact that Ms. Edwardes' participation from 1981 to 1984 when she operated her own vehicle included a succession of five others as drivers does not indicate consistency in the make-up of the rally team, though despite that her record of success in national rallies did show improvement. Finally, it was urged that the plaintiff had not been able to provide more than vague financial plans, for her expenses in performance rallies, for her participation with the support of sponsors or for her objective of establishing a garage for servicing performance and stock cars.

In addition to Moldowan, counsel for the parties referred to other cases. In Huband v. M.N.R., [1974] C.T.C. 2001; 74 D.T.C. 1039, the Tax Review Board had upheld the taxpayer's appeal and allowed deductions from income for losses incurred in the business of racing formula cars for profit. The losses in question were approximately $3,600 and $8,000 in successive years. Yet these were allowed where the Board was satisfied from the evidence that the taxpayer's actions clearly showed he was operating a business as a professional race car owner-driver. In that case the taxpayer participated in a class of the sport which had significantly greater prize money than was offered in performance rallying, and the taxpayer had won some prize money, accounted as revenue in his venture. In Cook v. M.N.R., [1985] 1 C.T.C. 2229; 85 D.T.C. 167, Bonner, T.C.J., who also decided Ms. Edwardes' appeal to the Tax Court, had there upheld the taxpayer's appeal and allowed deductions from income for losses incurred in 1980 and 1981 by a rally car driver who claimed his losses from a business concerned with his participation in car rallies and in preparation of rally cars. The losses for those two years had been disallowed by the Minister, after losses from three previous years had not been questioned. In that case the annual expenses claimed by the taxpayer were significantly less than those of Ms. Edwardes and the annual revenues were higher, so that the reasonableness of an expectation of profit was perhaps greater in that case. In addition, in that case the taxpayer was able to demonstrate a small profit from the business in 1983 when he had been manager and driver of an automobile manufacturers' entry in rallies, a factor Bonner, J. took as corroborating the reasonableness of the taxpayer's expectations in 1980 and 1981 that his programme would bear fruit.

Conclusion

The issue is essentially a determination of fact, in each case depending upon the evidence presented. Viewed in light of the factors outlined in Moldowan, the profit and loss experience of the plaintiff in past years was simply one of loss for the year 1981 when the business venture was initiated, and the plaintiff did participate in some business training by attendance at seminars. Yet the only year for which a profit was indicated was 1985 when revenue was attributed largely to sales of assets as the car, parts and tools were sold and the venture terminated, a source of revenue not relevant for considering the venture as a business in terms of a reasonable expectation of profit.

The evidence of the plaintiff's intended course of action was vague indeed. Essentially it was to succeed in rally racing and to establish a name for successful performance, then to seek one or more sponsors prepared to commit $30,000 to $100,000 a year for rallying activities, not detailed, but to be negotiated. The objective of such funding was to meet expenses incurred, to provide a salary or stipend for a driver and with his help to establish a garage for service to others or for do-it-yourself work. Those objectives, it seems to me were not realistic in view of the plaintiff's experience participating in rallies with annual expenses, including capital cost allowance, running at less than $20,000 per year. I think it unlikely sponsors would be encouraged to provide funds which were ultimately intended to assist the plaintiff to expand her venture beyond rally participation to the operation of garage facilities.

There was no evidence of the numbers of persons engaged in the sport who were successful in arranging for sponsors, particularly sponsors at the level of commitment envisaged by the plaintiff. In addition, there was here little evidence of planning for annual expenditures in rally participation, at least on any basis beyond the current year, subject always to the plaintiff's understandable concern that she could not afford more than $20,000 a year in expenses for her participation. There was no evidence of detailed planning for rally participation or of planning for expenses that would be expected to be incurred, or of planning for capital investment in the venture. Even in oral testimony there was no detailed evidence of what services the plaintiff anticipated providing to any sponsor whose support she might gain, other than by inference to any possible advertising benefit sponsorship might be seen to provide. Finally, the plaintiff herself seems to have turned away from her own plans in 1985 even prior to her marriage and moving from Fonthill, for she did not enter rallies with her own vehicle or as a co-driver, but rather acted briefly as manager for a women's rally team on a trial basis.

To the extent I include consideration of events after 1983, I do so in looking for support or otherwise for a perception of the plaintiff's plans as reasonably firm in the years here in question, 1982 and 1983, just as the plaintiff relied on later events to demonstrate that in those two years she was engaged in business with a reasonable expectation of profit. As she admitted, the plans first formed in 1981 as reasonably firm, were modified from time to time thereafter.

In the words of Rip, T.C.J. in Taillefer v. M.N.R., [1987] 2 C.T.C. 2137; 87 D.T.C. 418 at 2141 (D.T.C. 420): "The expectation of profit . . . is not a mere hopeful or wishful expectation; it is what a person having a basic knowledge of the undertaking would normally expect having regard to the various factors involved in the undertakings . . .". Here there was little detailed evidence of the plaintiff's concern with the factors involved in the undertaking that would lead to success in seeking sponsors whose assistance might render her rally participation a profit making venture. I have no doubt, as Mr. Boyce testified, a key factor was establishing a consistent record of success in performance rallies and the plaintiff obviously was concerned with this. But there was no real evidence of concerns about other factors.

My conclusion is that in 1982 and 1983 there was not a reasonable expectation of profit from the plaintiff's activities in performance car rallies. I have no doubt that she, and perhaps many other participants, had hopes and even a general strategy, drawn from the successful efforts of others, of how some assistance might be found to defray expenses, perhaps even to make a modest profit, if they were very fortunate. In my view, such aspirations hardly constitute the planning necessary for success in business. They do not, in an activity such as rally racing, with a few winners by the nature of the events, provide a basis for finding a reasonable expectation of profit in the absence of any record of achieving profit over the life of the venture up to the time of trial.

It is my conclusion the action of the plaintiff fails. The expenses here in question for the years 1982 and 1983, in all the circumstances of the case, were not incurred with a reasonable expectation of profit from a business. They do not, therefore, qualify as deductions from income permitted under paragraph 18(1)(a) and subsection 9(2) of the Income Tax Act.

An order goes dismissing the action, with costs to the defendant.

Appeal dismissed.