Tremblay v. The Queen, docket 97-1921(IT)I (Informal Procedure)

[OFFICIAL ENGLISH TRANSLATION]

97-1921(IT)I

BETWEEN:

ESTHER TREMBLAY,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on July 6, 1998, at Montréal, Quebec, by

the Honourable Judge Louise Lamarre Proulx

Appearances

Agent for the Appellant:             Michel Chapman

Agent for the Respondent:          Susan Saughnessy (student at law)

JUDGMENT

          The appeals from the assessments made under the Income Tax Act for the 1991, 1992 and 1993 taxation years are dismissed in accordance with the attached Reasons for Judgment.

Signed at Ottawa, Canada, this 16th day of July 1998.

"Louise Lamarre Proulx"

J.T.C.C.

[OFFICIAL ENGLISH TRANSLATION]

Date: 19980716

Docket: 97-1921(IT)I

BETWEEN:

ESTHER TREMBLAY,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Lamarre Proulx, J.T.C.C.

[1]      The appellant has appealed under the informal procedure from reassessments of the Minister of National Revenue (the "Minister") for the years 1991, 1992 and 1993.

[2]      The issue is whether the appellant's purchase and operation of a mini-excavator were in the nature of a business enterprise.

[3]      The facts on which the Minister relied in making his reassessments are set out in paragraphs 3, 4, 5, 6(a) to (f) and 7 of the Reply to the Notice of Appeal (the "Reply").

[TRANSLATION]

3.          In computing her income, the appellant deducted $9,422 for the 1991 taxation year, $9,583 for the 1992 taxation year and $6,408 for the 1993 taxation year as net business losses.

4.          On or about October 17, 1994, the appellant filed an amended return for the 1993 taxation year seeking to have her business loss adjusted to $7,908 and claiming a deduction of $1,669 for carrying charges.

5.          By notices of reassessment dated May 18, 1995, for the 1991, 1992 and 1993 taxation years, the Minister of National Revenue ("the Minister") denied the appellant the said business losses of $9,422 in 1991, $9,583 in 1992 and $7,908 in 1993 and the deduction of $1,669 for carrying charges.

6.                   In making these reassessments, the Minister made in particular the following assumptions of fact:

a.          in 1990, the appellant started an alleged excavation business under the firm name of "Mini Excavation B.M. Tremblay";

b.          during the years under appeal, the appellant had a job with her employer, Paysage Claude;

c.          during the years under appeal, the appellant also received unemployment insurance benefits;

d.          the business' highest gross income was only $1,610, which it earned during the 1993 taxation year;

e.          since 1990, the appellant has claimed business losses each year;

f.           the appellant did not have much income compared with the expenses incurred, and she has thus not shown that she had a business with an expectation of profit;

. . .

7.          At the objection stage, the Minister noted that the appellant's business loss for the 1992 and 1993 taxation years included a rent expense of $1,800 for each of those two years, an expense which could not exceed the appellant's income from the business.

[4]      Testimony was given by the appellant and Michel Chapman, C.A. Mr. Chapman acted as the appellant's agent at the hearing. He was the accountant and financial advisor of the appellant and Paysage Claude, which is referred to in subparagraph 6(b) of the Reply.

[5]      The appellant and her husband started the landscaping business operating as Paysage Claude in 1987. They each owned 20 percent of its shares. Their three sons each had 20 percent of the shares as well. Their sons were born in 1957, 1961 and 1963. According to the appellant, they each worked for the business.

[6]      Around 1990, Paysage Claude acquired a nursery, which consisted of a piece of land where trees, plants and gardening products were sold. The appellant looked after the nursery. She also played an active role in managing Paysage Claude's landscaping activities.

[7]      In 1989, the appellant's husband died and left her his shares.

[8]      Mr. Chapman told the Court that he was the one who had advised the appellant to buy the excavator personally because of Paysage Claude's cash flow problems and the problems the shareholders were having agreeing with one another. The excavator was used exclusively by Paysage Claude, which paid the appellant by giving her the fees it charged clients to use the excavator for landscaping work. It thus gave her $920, $1,157 and $1,610 for 1991, 1992 and 1993, as can be seen from the financial statements for each of those years. The appellant's tax returns and the financial statements were filed as Exhibit I-1.

[9]      The operating expenses for each year were as follows:

[translation]

MINI EXCAVATION B.M. TREMBLAY ENR.

INCOME STATEMENT

FOR THE FISCAL PERIOD ENDING ON DECEMBER 31, 1991

                                                                           1991                             1990

INCOME                                                              $920                        $1,260

OPERATING EXPENSES

            Professional fees                                         500                               500

            Maintenance and repairs                             675                               826

            Bank charges                                              149                               384

            Interest on long-term liability                  2,408                          3,281

            Depreciation - rolling stock           5,890                          8,415

            Depreciation - equipment               720                               900

                                                                        (10,342)                        (14,306)

NET LOSS                                                     $( 9,422)                      $(13,406)

MINI EXCAVATION B.M. TREMBLAY ENR.

INCOME STATEMENT

FOR THE FISCAL PERIOD ENDING ON DECEMBER 31, 1992

                                                                           1992                             1991

INCOME                                                            $1,157                           $920

OPERATING EXPENSES

            Rent                                                         1,800                                 0

            Maintenance and repair of premises          1,366                              675

            Travel expenses                                           622                                 0

            Professional fees                                          500                              500

            Interest and bank charges                            218                              149

            Interest on long-term liability                     1,534                         2,408

            Depreciation - rolling stock            4,124                            5,890

            Depreciation - equipment               576                              720

                                                                     $(10,740)                      $(10,342)

NET PROFIT                                                   $( 9,583)                       $( 9,422)

MINI EXCAVATION B.M. TREMBLAY ENR.

INCOME STATEMENT

FOR THE FISCAL PERIOD ENDING ON DECEMBER 31, 1993

                                                                           1993             

INCOME                                                            $1,610

OPERATING EXPENSES

            Rent                                                         $1,800          

            Maintenance and repair of premises              926           

            Travel expenses                                            617           

            Professional fees                                           500           

            Interest and bank charges                             181           

            Interest on long-term liability                         647           

            Depreciation - rolling stock                   2,886    

            Depreciation - equipment                 461           

                                                                        $( 8,018)

NET LOSS                                                       $( 6,408)

[10]     It can be seen that the losses for each of the years at issue were very high.

Conclusion

[11]     In circumstances in which the excavator was available solely to Paysage Claude, it is difficult to believe that the appellant purchased it personally merely because she wanted to ensure that she had full control over it rather than sharing control with her sons, which she would have had to do had it been purchased by Paysage Claude.

[12]     Moreover, when a taxpayer claims that an activity of his is a business, the taxpayer must demonstrate its business structure. A normal business structure for a rental business or an excavator operation business would have required that a prior agreement in principle be entered into with the sole user of the excavator. That agreement would have provided for rental fees that were high enough to cover the operating expenses and allow for a profit margin. In actual fact, the use of the excavator was subject to the contracts Paysage Claude obtained and the entries it was willing to make concerning the fees charged for use of the excavator. Those were the fees handed over to the appellant.

[13]     The conclusion is obvious: there was nothing commercial about the agreement with Paysage Claude. Moreover, it should be noted that, when the depreciation on the excavator decreased, the appellant added the cost of renting an office, the usefulness of which one cannot help but doubt given that the excavator was available exclusively to a single user.

[14]     I must not examine activities carried on by Paysage Claude jointly with those carried on by the appellant and conclude that the appellant's activities, through the excavator she owned, were useful to the operation of Paysage Claude. I must consider each taxpayer's activities and determine whether they constituted a business enterprise. In the case of the appellant, the activities did not constitute a business enterprise for the foregoing reasons.

[15]     The appellant and the accountant, Mr. Chapman, argued that an excavator cannot be purchased for personal reasons. It is accepted in tax law that expenses may have a purpose other than a personal purpose, but that does not make them expenses incurred to earn business income. Only expenses that are genuinely incurred for the purpose of gaining business income may be deducted in computing the income from the business.

[16]     In light of the evidence, it is my view that the appellant decided to purchase the excavator personally for reasons other than the commercial reason of operating an excavator rental business. The decision might have been made to reduce the amount the appellant earned through her salary and unemployment insurance benefits or to benefit Paysage Claude's business, but its purpose was not to make profits.

[17]     Mr. Chapman said that the appellant had genuinely incurred expenses and that, if those expenses were not business expenses, they should be considered business investment losses. As counsel for the respondent pointed out, this is a significant change of position concerning the computation of what is allowable. That must be argued in the Notice of Appeal or, better still, at the notice of objection stage so that there can be a legal debate during the hearing. Since there has been no legal debate on the issue, I cannot rule on it.

[18]     Therefore, the appeal is dismissed.

Signed at Ottawa, Canada, this 16th day of July 1998.

"Louise Lamarre Proulx"

J.T.C.C.