Citation: 2008TCC392
Date: 20080820
Docket: 2008-681(IT)I
BETWEEN:
JOSEPH L.J. THOMPSON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Angers J.
[1]
This
is an appeal from an assessment by the Minister of National Revenue (the
“Minister”) for the appellant’s 2003, 2004 and 2005 taxation years. For those
three years, the appellant reported net professional income of $13,253, $14,485
and $16,310 respectively. That income and the related expenses are not the
subject of this appeal. The appellant also claimed for the three taxation years
in question business losses, which the Minister disallowed on the basis that
the appellant was not carrying on a business and that, if he was, the expenses claimed
were not incurred for the purpose of gaining or producing income or, alternatively,
were not reasonable.
The business losses
claimed by the appellant are as follows:
|
Year
|
Gross
Business Income
|
Expenses
|
Net
Loss
|
|
2003
|
$315
|
$8,289
|
($7,974)
|
|
2004
|
$218
|
$4,687
|
($4,469)
|
|
2005
|
$283
|
$5,603
|
($5,320)
|
The details of the expenses claimed by the appellant
for each taxation year are as follows:
|
|
2003
|
2004
|
2005
|
|
Gross Business
Income Reported
|
$315.71
|
$218.13
|
$283.90
|
|
|
|
|
|
|
Expenses
Claimed on Return
|
|
|
|
|
Advertising
|
1,240.14
|
692.49
|
762.75
|
|
Business Taxes
|
397.39
|
142.70
|
158.15
|
|
Delivery,
Freight
|
140.40
|
37.77
|
34.56
|
|
Non Motor
Vehicle Fuel
|
80.02
|
0.00
|
0.00
|
|
Meals &
Entertainment (50%)
|
72.73
|
34.73
|
83.67
|
|
Motor Vehicle
Expenses
|
1,767.09
|
757.82
|
1,152.66
|
|
Office
Expenses
|
103.38
|
35.86
|
26.81
|
|
Supplies
|
944.88
|
1,014.33
|
1,094.19
|
|
Travel
|
1,978.52
|
1,151.18
|
1,384.49
|
|
Telephone
& Utilities
|
236.42
|
44.95
|
239.27
|
|
Other Expenses
|
66.00
|
32.43
|
16.43
|
|
Vehicle
Capital Cost Allowance
|
1,263.33
|
743.35
|
651.72
|
|
Total Expenses
|
$8,290.30
|
$4,687.61
|
$5,604.70
|
|
|
|
|
|
|
Net Business
Income (Loss)
|
($7,974.59)
|
($4,469.48)
|
($5,320.80)
|
[2]
The
evidence also reveals that the Quixtar products were purchased for personal use
and that most of the appellant’s clients are family members. The appellant has
been retired for over nine years after a career in education as a school
teacher and school administrator. A few months before his retirement, he
registered as a Quixtar independent business owner, and he operated the
business out of his home. He also continued working in the area of education as
a facilitator and consultant, this work constituted his professional
activities. In August 2004, the appellant began a gardening operation and he started
selling natural products in October 2005.
[3]
According
to the appellant, Quixtar may be defined as a business consisting in the sale
of consumable goods, with earnings based on volume of sales. He further
described the business, in a questionnaire that he filled out for the purpose
of the Canada Revenue Agency audit, as consisting in the sale of consumable
products for home care and personal care and the sale of multivitamins and
supplements. The appellant sold the products at his cost with -as he put it - product
income based upon volume of sales versus retail profit. The evidence also
reveals that the Quixtar products were purchased by him for personal use and
that most of his clients were family members. He used the Internet to network
with those who perhaps wished to establish their own home businesses. Neither
in the three taxation years under appeal nor in previous years did the appellant
succeed in recruiting any Quixtar independent business owners, but he continued
to attempt, and still does attempt, to recruit. In fact, it is acknowledged by
the auditor that the appellant went out to meet people and spent time with them
in order to explain the business and recruit potential business owners. The appellant
kept a day book of his activities, indicating as well the number of
presentations he made to these potential recruits. He was simply not successful
in recruiting anyone.
[4]
As
for the gardening operations, which started in 2004, the appellant grows beets,
which he sells to a local Polish restaurant, and blue potatoes specially for one
customer. The natural health products business, which was carried on for only 2
months in the 2005 taxation year, consists of selling these products by
offering them to independent pharmacists and other health stores.
[5]
The appellant
admits that he did not do any advertising for his activities in newspapers,
newsletters, the yellow pages or other print publications, or on television or
radio. He pointed out that the Quixtar corporation did not allow public
advertising by independent business owners, as the business grows by networking
through face-to-face and telephone contacts as well as through showing the
business plan regularly. The appellant admitted that the advertising expenses
claimed in relation to Quixtar included the cost of products he purchased and
consumed personally. In answering the questionnaire referred to above, he
stated as the reason for the losses he incurred the fact that he sold his goods
at his cost rather than at the retail price; he added that he intended in future
to charge his new Quixtar customers retail prices and increase his customer
base and develop his business that way. The questionnaire was filled out in
March of 2007.
[6]
A
summary of his gross business income from 1998 to 2005 shows a total of $2,274
for an average of $284 a year, with expenses of $48,318, for an average of
$6,039 a year. His net business losses total $46,044 for an average of $5,755 a
year.
[7]
The
Supreme Court of Canada in Stewart v. Canada., [2002] 2 S.C.R. 645,
adopted a new approach regarding the application of the reasonable expectation
of profit test. Paragraphs 60 and 54 of that decision best summarize this new
approach.
[60] 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. . . .
[54] 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.
[8]
In Raghavan v. R.,
[2007] 2 C.T.C. 232, the Federal Court of Appeal worded this two-step approach
as follows in paragraphs 8 and 9:
8 First, a court must determine if the taxpayer has a
source of income from a business for the purpose of section 9 of the ITA.
The ultimate objective of this part of the test is to distinguish between
commercial and personal activities (para. 51), in accordance with the
methodology prescribed by the Court, especially at paras. 52‑56, and
60.
9
Second, having found a source of
income, a court must determine if the expenses claimed by the taxpayer may be
deducted pursuant to subsection 18(1) from the income earned from the business.
If they can, the expenses will be allowed, but only to the extent that they are
“reasonable” under section 67: at para. 57. The Court emphasized (at para. 60):
Whether or not a business exists is a separate question
from the deductibility of expenses.
[9]
It
is therefore incumbent on the appellant to establish, on a balance of
probabilities, that the primary objective of his activities is the pursuit of
profit and that what he does to reach that objective is done by him in a
serious businesslike manner, acting as would a serious business person.
[10]
In
this instance, the evidence does disclose that the appellant did spend time attempting
to recruit independent Quixtar business owners, at least according to a record
he kept of that activity. Unfortunately, he was unable to recruit any, not only
during the three taxation years under appeal but in all the time since he
joined Quixtar in 1998. What the evidence does not disclose is why these
endeavours were unsuccessful for so many years and what the appellant proposes to
do to change the results. The evidence is unclear as to the importance of
recruiting independent business owners and I can only assume that the appellant
would have benefited from their respective sales. That seems to be an important
part of the Quixtar earning structure and the appellant has failed to provide
clarification with respect thereto; this is a particularly significant point when
one considers the number of years spent by the appellant attempting to recruit.
[11]
Moreover,
it is disturbing to find out that the appellant was selling his Quixtar
products at cost, thereby eliminating any possibility of profit, and that he himself
and family members were his only clients. In addition, some of the appellant’s
personal purchases were claimed as advertising expenses with respect to promotion
of the products. The evidence is clearly insufficient to permit this court to
find that the Quixtar operations as conducted by the appellant were such that their
primary objective was the pursuit of profit.
[12]
In
my opinion, the appellant has also failed to establish, on a balance of
probabilities, that his gardening activity, and the sale of health products in
2005, were conducted in a serious, businesslike manner in pursuit of profit.
Not only do we not know what each activity generated in terms of gross revenues
for 2004 and 2005, but the evidence does not disclose, as regards the gardening
business, how it was conducted, whether the appellant has any expertise in that
area, the size of the garden, the quality and quantity of the products being
offered for sale, to whom they were offered and in what market conditions, and whether
any of these products met government standards in terms of consumable goods.
All the evidence discloses is that the appellant was growing beets and blue
potatoes and had one client for each product. The evidence does not show the
cost to produce versus potential sales, thus making it impossible to conclude
that the appellant in fact had the pursuit of profit as his objective or was conducting
his gardening activity in a serious, businesslike manner.
[13]
The
evidence is also insufficient in terms of the sale of health products to
independent pharmacists and health stores. Although this activity began in
October of 2005 and was in its early stages, the evidence does not reveal any
business plan or any sales projections showing the activity’s viability. Other
than being told that the products were health products, the court was provided
with no evidence to show how the appellant was actually conducting the activity
in terms of where he bought the products, in what quantities, his cost and mark-up,
his inventory, the time spent on actually selling the products or his projections
in this regard, or potential or actual sales and profits, at least for 2005. The
evidence is simply insufficient for this court to conclude that this activity was
conducted in a businesslike manner in 2005.
[14]
The appellant
appears to me to be a very honest person with many passions and who greatly
enjoys what he does, and I admire that in him. The activities described may
have a business aspect but they carry a far greater personal element in the
case of an appellant who seeks to occupy his leisure time, who enjoys what he
does and has little concern for profit. In my opinion, the appellant’s activities
do not constitute a source of income as contemplated by section 9 of the Act.
The evidence is insufficient for me to conclude that they were conducted in the
pursuit of profit.
[15]
The
appeal is dismissed.
Signed at Edmundston, New Brunswick, this 20th day of August 2008.
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