Date: 19980817
Docket: 97-2730(IT)I
BETWEEN:
LUCIEN ST. MARTIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND BETWEEN:
97-2731(IT)I
ANN MARIE ST. MARTIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
BOWIE J.T.C.C.
[1] The appeals of Lucien St. Martin
and his wife Ann Marie St. Martin were heard together on common
evidence. They both appeal from reassessments for income tax for
the taxation years 1992, 1993 and 1994. Mr. St. Martin was
reassessed to disallow his claim to be entitled, in computing his
income under section 3 of the Income Tax Act (the
Act), to deduct the losses which he claimed to have
sustained in each of those years in connection with a rental
property owned by him and his wife in Florida, and in connection
with a business which involved the buying and selling of sports
cards. The Minister of National Revenue (the Minister) also
disallowed his claim to be entitled to deduct an allowable
business investment loss (ABIL) under paragraph 39(1)(c)
of the Act in each of these three years.
[2] Ann Marie St. Martin was
reassessed to disallow her claims to losses in connection with
the Florida property, and to disallow claims in each of the three
years for losses incurred in connection with the rental by her to
her husband of space in the basement of the family home, for use
in connection with the sports card business. The family home is
registered in her name.
[3] The Minister's position is that
none of the Florida rental property, the sports card business, or
the basement rental could have been said in the years under
appeal to have had a reasonable expectation of profit, and that
they were therefore not businesses, or sources of income, and
that their losses therefore cannot be taken into account and
offset against the employment incomes of the two Appellants. So
far as the ABIL claim is concerned, the Minister's position is
that it has not been proven that Mr. St. Martin invested, by way
of loan, shareholding or otherwise, in a small business
corporation, or, if he did, that the investment was lost in the
years claimed.
[4] I shall deal first with the
Florida property. It is owned jointly on a 50-50 basis by the
Appellants, and so their claims are identical. In 1984 they
purchased two units, one week each, of what is called an interval
ownership property, sometimes known as a time share, in St.
Petersburg, Florida. The premises they bought consist of a two
bedroom, two bathroom unit, with kitchen, living and dining
rooms. The common elements shared by all of the unit holders
include a luxurious swimming pool, and other amenities. Their
evidence was that they intended to rent out their two weeks of
entitlement to use of the property to produce an income.
According to their evidence, the constitutive documents for this
project require that the property be sold at the end of 25 years,
and the proceeds divided among the owners according to their
respective shares. They foresaw, and still foresee, a very large
appreciation of their investment over the 25-year
period.
[5] All did not go well in connection
with the rentals, however. They had difficulty getting people to
rent the property. Perhaps this is in some way connected with the
fact that their two weeks of ownership are in mid-summer. In any
event, there has been constant difficulty obtaining tenants since
the outset, although this has now been overcome, at least in
part, by the return for the third year of a tenant for one of the
two weeks. In the three years under appeal the gross rental
income from the two units was $0.00, $800.00, and $1,100.00
respectively. Remarkably, they claimed against these amounts
expenses totalling $9,192.79, $8,758.11 and $13,472.00. These
claimed expenses were subsequently reduced by them by amounts of
$2,237.00, $2,338.00 and $3,488.00, to produce revised claims for
losses in the amounts of $6,955.00 for 1992, $5,620.00 for 1993,
and $8,884.00 for 1994. Each of them claims half of these
losses.
[6] The largest single expense in
connection with the property is for interest on the money
borrowed to purchase the units. The units cost $9,000.00 each, a
total of $18,000.00. The evidence is not clear as to the exact
amount borrowed, but it appears to have been most if not all of
the purchase price. It was raised by taking a second mortgage on
the family home. The interest expenses for the three years under
appeal are $4,800.00, $4,900.00 and $4,900.00 respectively. There
are charges for maintenance and taxes payable each year of
$780.00, $830.00 and $880.00. It was agreed by the Appellants
that the most optimistic figure for a potential total rental
income for the two weeks was $2,000.00. It is apparent at a
glance, therefore, that if they were able to rent both units at
the most favourable rate each year then the costs for interest,
maintenance and taxes would amount to almost three times the
gross revenues. The most casual observer can see that there is no
potential here for anything but extremely large losses. The
Appellants, in their evidence and argument, dealt with this by
pointing out that they have made arrangements whereby they will
pay off the mortgage loan by the year 2000. After that, they say,
profits will be made. There are several reasons why this does not
avail them.
[7] First, we are dealing here with
the years 1992, 1993 and 1994. The rearrangement of the financing
was done in about 1996. There was no indication during the years
under appeal that the mortgage interest would ever be brought
down to a manageable amount. Second, no evidence was given to
show just where the money to do this will come from, other than
that they will increase their payments. No doubt the large
refunds claimed by them in filing their income tax returns each
year would be helpful, if they were entitled to them. For the
reasons which follow I am of the opinion that they are not.
Third, there are other expenses claimed by them for the cost of
visiting the properties which, at least in the years under
appeal, greatly exceeded the revenues. Mr. and Mrs. St. Martin
would have me believe that these expenses for visiting the
property were unusual in those years, and were required only
because they had to be there each year to deal with numerous
problems in connection with the management of the property which
were interfering with its potential profitability. These
expenses, they say, will not recur. I do not accept that as
anything more than a self-serving statement of intent for the
purposes of these appeals.
[8] The most cursory examination of
the expenses claimed by these Appellants for visiting the
property reveals that they are largely personal living expenses
of the Appellants and their three children, nothing more. They
have charged for all the travel and living expenses of all the
members of the family during their stay there. In 1993,
remarkably, the claimed business expenses included the cost of a
cruise for the whole family. Mr. St. Martin tried valiantly in
his evidence to justify this on the basis that it was
compensation for his wife and children for the fact that in 1992
they had all worked without pay to help him start up his sports
card business. The cost of the children's air fares and other
expenses he justifies on the basis that they were too young to be
left at home while he and his wife paid their annual visits to
the property. It apparently did not occur to them that one of the
Appellants could go to Florida to inspect the property and deal
with the management difficulties, and the other stay at home with
the children. I find on the evidence that these trips to Florida,
to the extent that more than one family member went, are nothing
but a very thinly disguised vacation to be enjoyed by the St.
Martin family in each of the three years under appeal. Their
enjoyment was no doubt enhanced by their belief, mistaken though
it was, that their fellow taxpayers would be contributing a
substantial subsidy towards the cost.
[9] In Tonn v. Canada,[1] the Federal Court of
Appeal indicated that where there is a personal use element
involved in a claimed rental loss case the Appellant will be
called upon to justify objectively that the operation was in fact
a business. Suspicious circumstances, the Court said, will lead
to closer scrutiny. In Mohammad v.Canada[2] the same Court said that
where a rental property is purchased using high ratio financing,
the cost of which renders profit in the early years unattainable,
the taxpayer will have to show by cogent evidence that he intends
to pay down the debt, and that he will have the resources to do
so, if the claimed rental loss is to be sustained. Vague
expectations of an ability to pay in the future are not enough;
the Court said that the burden is to be discharged by showing
that significant payments of principal have been made in the
taxation years closely following the year of purchase. That has
not been done here.
[10] To summarize, these Appellants did not,
in any of the years up to and including 1994, have any
possibility, far less any reasonable expectation, of profit from
the Florida property. I find that their intention and their
expectation was that they would take vacations in Florida, which
would be subsidized by the taxpayers of Canada, and that
eventually the purchase money loan would be paid off, at least in
part from the tax savings which they expected to realize by the
losses they would claim. On this issue their appeals fail.
[11] I turn next to the sports card
business. In the spring of 1992 Mr. St. Martin lost his job with
an insurance company. He received a lump sum severance payment
from the company, however, and decided that he would begin a
business. He testified that he researched the prospects of
success in the business of buying and selling sports cards, and
concluded that it was something at which he could make money. It
was, he said, something that his sons had an interest in, but on
cross-examination he denied that it was a hobby of his own. He
stated categorically that he had not owned any sports cards since
his university days. Having decided that he would enter into this
business, he set about acquiring an inventory of sports cards to
resell. The exhibits which he entered at the trial suggest to me
that some of these may have been bought at wholesale, but that
many of them were bought from retailers. He looked into the
possibility of renting space in a strip mall near his home, but
found that it would require him to enter into a three-year lease
at a monthly rent far greater than he could afford. Instead, he
agreed to pay his wife $90.00 or $100.00 per month to rent part
of the basement of their home in which to carry out his sports
card activities. The rent appears to have been struck by her, not
on the basis of any examination of the market for similar space,
but on the basis that this was about what he could afford to pay,
at least initially. To sell the cards he travelled on week-ends
to shows where he could rent a table to sell his stock to
collectors. By the summer of 1992, Mr. St. Martin had obtained
part-time work in the insurance field, and by the fall of 1992 he
had a full-time job with an insurance company. His sports
card business therefore soon became, at best, a part-time
activity which he carried on in the evenings and week-ends.
[12] The Minister has not accepted the
expenses claimed by the Appellant in connection with this
business as having been established. The pleadings put in issue
whether the amounts were expended, and, if they were, whether
they were proper business expenses. This is not surprising,
considering the state of Mr. St. Martin's records. He put into
evidence a bundle of papers, principally photocopies of receipts
of one kind or another. There are also some summaries of claims
for G.S.T. rebates. There is nothing that could be called a set
of books, however, or even an organized list of revenues and
expenses. The Appellant explained that he was too busy to keep
such records after September 1992, when he started to work full
time again. The so-called records are a sorry lot indeed, and do
nothing to convince me that Mr. St. Martin was in any sense in
business.
[13] Mr. St. Martin claimed in his evidence
that he had created a business plan for the sports card business
at the outset. He had with him in Court two boxes of documents,
and he maintained that it had been in one of them at one time. He
examined the auditor who was responsible for his reassessment,
who denied ever having seen a business plan in the boxes of
documents. Mr. St. Martin specifically disavowed making any
suggestion that the business plan had been removed from his boxes
of documents while they were in the possession of Revenue Canada
officials. He produced no business plan, and I draw the inference
that there never was one.
[14] What I can glean from the evidence of
Mr. St. Martin about the financial results of the sports card
'business' is this. Gross sales in 1992 were $1,030.00. of this
amount $600.00 was from sales made by one of Mr. St. Martin's
sons, who was with him at a card show in a mall in Etobicoke, to
a 12-year old boy from Mexico who was collecting José
Canseco cards to resell there, where they are apparently in high
demand. The expenses which he claims for that year are $1,162.00
for the cost of goods sold, and $6,211.00 for other expenses,
being automobile, office expense, and rent paid to his wife in
the amount of $1,080.00. For the years 1993 and 1994 the gross
revenues total $428.00 and $320.00 respectively. The total
expenses in those years amount to $5,224.00 and $2,586.00.
Altogether Mr. St. Martin claims losses of $6,343.00, $5,181.00
and $2,655.00 for the three years. He attributes the poor
financial results to a downturn in the sports card business, and
says that by 1994 he had virtually stopped trying to sell his
cards, but that he had by then amassed an inventory of some
500,000 cards, and will be ready to re-enter the field when
sports card collecting comes back into vogue. He claims that many
of his are vintage cards, and so have lasting intrinsic value.
For now, however, he wishes to deduct business losses in the
three years totalling about $14,000.00 from his other income
under section 3 of the Act. $3,480.00 of that $14,000.00
results from the payment to his wife of rent for the basement of
the family home.
[15] Mrs. St. Martin, for her part, takes
the position that she is entitled to deduct losses incurred by
her in connection with the rental of the basement space to her
husband. In filing her returns for 1992, 1993 and 1994 she has
claimed losses in excess of $3,000.00 for each of the three
years, a total of $10,035.00, said to arise from renting the
"business office" to her husband. These losses are arrived at by
totalling all of the expenses of the house, and allocating them
in proportion to the rented space. In 1993 even the cable
television, the telephone, and an amount for a guard dog were
charged proportionately to the basement rental area. Prior to
this arrangement with her husband beginning in 1992, Mrs. St.
Martin had not rented out any space in the house. Her claim is
predicated upon the theory that when she permitted her husband to
use the basement to store and sort his sports cards, and he paid
her an arbitrarily fixed rent of $90 to $100 for the privilege,
the basement became, if not a business, then a source of income,
the losses from which could be deducted by her from her salary as
a teacher for the purpose of computing her income under section 3
of the Act.
[16] I am mindful of the edict of the
Federal Court of Appeal in the Tonn[3] case to the effect that
embryonic businesses must be allowed some time to grow to
profitability, and that neither the Minister nor the Courts
should be quick to second guess the judgment of people who are
trying to start a business. This, in my view, is not a case where
the taxpayer has attempted to start a genuine business which had
some prospect, even a remote one, of success. Sports cards may
not have been a hobby of Mr. St. Martin, but they seem to have
been of great interest to his sons, who went with him to the
shows, and otherwise took part in the activity. This operation
has none of the hallmarks of a business about it. No plan, no
books of account, no revenues to speak of. I agree with Bowman J,
who said earlier this year in Kaye v. The Queen[4]:
One cannot view the
reasonableness of the expectation of profit in isolation. One
must ask "Would a reasonable person, looking at a particular
activity and applying ordinary standards of commercial common
sense, say 'yes, this is a business'?" In answering this question
the hypothetical reasonable person would look at such things as
capitalization, knowledge of the participant and time spent. He
or she would also consider whether the person claiming to be in
business has gone about it in an orderly, businesslike way and in
the way that a business person would normally be expected to
do.
below,[5] he
said
... Simply put, if you want to be treated as carrying on a
business, you should act like a businessman.
[17] Applying that test to the so-called
sports card business, I conclude that it fails. It was not and
never could become a business. The spin-off from it,
Mrs. St. Martin's claim for rental losses, can best be
described as an exercise in avarice. In fairness to her, though,
I must say that I believe her evidence to the effect that her
husband prepared her income tax returns, and that she simply
signed what he put in front of her. The avarice is his, not
hers.
[18] There remains the claim for an ABIL.
This is based upon certain amounts which Mr. St. Martin said he
invested in an insurance brokerage firm run by a Mr. Wayne
Bullard. It was called Allrite Insurance Broker, and later
Associated Insurance Brokers. Mr. St. Martin had some cash on
hand in the spring of 1992, arising out of his severance from his
employer. Mr. Bullard, I think it is fair to say, set out to
relieve him of it. He came up with a scheme whereby the
Appellant, and perhaps some other investors, would provide short
term funds to clients of the insurance brokerage who needed cash
to pay their premiums falling due. The return would be 10%, or so
it was said. Mr. St. Martin advanced cash to Mr. Bullard in
furtherance of this scheme. Remarkably, the terms were not
reduced to writing, even in the most informal way. Exactly what
amounts he advanced is not clear to me, but it appears to have
been somewhere between $20,000.00 and $25,000.00, between 1992
and 1994. Some of this was recovered by repayments made, and
ultimately through litigation, but much of it was lost. Mr.
Bullard has since been imprisoned, I am told. The Appellant takes
the position that he made the advances to Mr. Bullard's company,
which, he says is a corporation, and that they were in the nature
of an investment in that corporation.
[19] The claim for an ABIL cannot succeed.
Quite apart from the difficulties of proof of the amounts of the
loans, the purpose for which they were made, and the point at
which they became unrecoverable, the insurmountable problem with
this claim is that the evidence, such as it is, leads me to
conclude that if any loans were made, they were made to Mr.
Bullard in his personal capacity.
[20] First, the documentary evidence
relating to this issue consists of a pile of papers in a folder.
From those papers it seems clear that neither Allrite Insurance
Broker nor Associated Insurance Brokers was incorporated. They
seem to have been names under which Mr. Bullard carried on
business in his personal capacity. In any event, the cheques
written by the Appellant, to the extent that they are to be found
at all in the evidence, are made out to Mr. Bullard personally.
According to the Appellant's evidence some of the money was
handed over by him to Mr. Bullard in cash. To the extent
that there are cheques by way of repayment (many of them were
returned NSF by the bank), they are drawn on Mr. Bullard's
personal account. I find that any loan which was made by the
Appellant in his dealings with Mr. Bullard was made to Mr.
Bullard, and not to a corporation. To qualify as a business
investment loss under paragraph 39(1)(c) of the
Act, a bad debt must have arisen from a loan to a
corporation which meets the other requirements of the Act.
Loans to an individual cannot qualify.
[21] The appeals of both Appellants for the
taxation years 1992, 1993 and 1994 are dismissed.
Signed at Ottawa, Canada, this 17th day of August, 1998.
J.T.C.C.
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