Citation: 2005TCC130
Date: 20050211
Docket: 2004-2304(IT)I
BETWEEN:
JAMES E. KELLY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Teskey,
J.
[1] The Appellant, in his Notice of Appeal wherein he appealed
his assessments of income tax for the years 2000 and 2001, elected the informal
procedure.
Issue
[2] Whether disallowed expenses of $13,445 and $7,540 for
the years 2000 and 2001 were made or incurred for the purpose of gaining income
from a business; and if so, were the disallowed expenses unreasonable in the
circumstances and therefore ought not to be allowed?
Facts
[3] The Appellant is and has been a full time firefighter
for the City of Toronto for the last 25 years.
[4] As a firefighter, the Appellant works on average
42 hours a week. The day shift is 10 hours and the night shift is
14 hours.
[5] In 1991, the Appellant started a new activity entitled
"Learn Not to Burn".
[6] He described the activity as a marketing business in
that he would attract corporate sponsors whose logos would be displayed on his
racing car, together with promotional work he would perform for the sponsor.
[7] In 1991, Nissan provided the Appellant with a sedan
motor vehicle, which he used up to 1995, when he started to race a
Formula 1200 and in 1999, he switched to a Formula 1600 vehicle.
[8] The Appellant, in 1990, wanted to be a racecar driver
so he attended car racing school in that year and started his "Learn Not
to Burn" activity in 1991, and again, went to car racing school. He also
attended car racing school in 1992.
[9] The Appellant stated that prize money available was negligible
and that in 1991 and 1992, he gave all prize money to charity as he felt that
would be good advertising.
[10] As prize money was insignificant, the Appellant
believed that the way to make a profit was by attracting corporate sponsors
that would produce sufficient gross income to make money at the activity.
[11] The Appellant claims that in the month of May through
September, the racing would take between 400 to 1,000 hours.
[12] The Appellant said in cross‑examination that his
activity took the same amount of time as his full time firefighter job, which averaged
42 hours a week.
[13] During the whole period of time that the activity was
being performed, he worked for 353543 Ontario Ltd., soliciting mortgages. For
this, he was paid an annual salary of $12,500. This job entailed 20 hours
a week.
[14] The Appellant had Loblaws as a sponsor for
11 years. The amount of funding was negotiated in January of each year.
[15] In the year 2000, Loblaws' sponsorship paid the
Appellant $17,500, which represented the total gross revenue for this activity.
[16] Since the gross revenue for 1999 was also $17,500, I find
that was all Loblaws funds.
[17] In 2001, Loblaws paid $20,000 to the Appellant for
sponsorship and in 2002, $10,000.
[18] In 1992, the Appellant had, besides Loblaws, three
other corporations sponsoring him.
[19] Year 1997 was the Appellant's best year in attracting
sponsorship, which totaled $28,222. That year, the Appellant did not report any
net business income and he stated it was a break even year.
[20] The Appellant stated that in an attempt to attract more
corporate sponsors over the period, he changed his method of approach.
[21] The Appellant made yearly changes in personnel, but no
evidence was submitted to allow the Court to determine whether this was a cost
saving move or that the jobs were strictly seasonal and would be necessitating
change in any event.
[22] The Appellant stated that the more he was successful at
the track, the easier it would be to attract sponsorship. One year, he came
second on the circuit.
[23] From the start of 1991 to 1994 inclusively, the
Appellant raced for Nissan.
[24] In 1992, Loblaws purchased the hood of the Appellant's
vehicle.
[25] The following schedule for the period 1987 to 2003
shows the gross revenues for activities, the expenses thereof and the losses
claimed. The revenues from 1987 to 1990 inclusively were from a different
activity that was not disclosed to the Court and is ignored:
YEAR
|
GROSS REVENUE
|
EXPENSES
|
LOSS
|
|
1987
|
$ 4,325
|
$ 9,764
|
$ 5,439
|
|
1988
|
1,825
|
7,073
|
5,284
|
|
1989
|
3,600
|
7,998
|
4,398
|
|
1990
|
6,350
|
9,187
|
2,837
|
|
1991
|
8,500
|
29,977
|
21,477
|
|
1992
|
22,110
|
34,492
|
12,382
|
|
1993
|
12,925
|
22,930
|
10,000
|
|
1994
|
20,243
|
31,151
|
10,908
|
|
1995
|
18,200
|
24,922
|
6,722
|
|
1996
|
14,135
|
20,100
|
5,965
|
|
1997
|
28,222
|
28,222
|
0
|
|
1998
|
18,000
|
29,056
|
11,056
|
|
1999
|
17,500
|
26,997
|
9,497
|
|
2000
|
17,500
|
30,945
|
13,440
|
|
2001
|
20,000
|
27,530
|
7,530
|
|
2002
|
10,000
|
25,303
|
15,303
|
|
2003
|
Activity has ceased
|
The Jurisprudence
[26] The Supreme Court of Canada, in Stewart v. Canada,
[2002] 2 S.C.R. 645, at the following paragraphs, said:
50 It
is clear that in order to apply s. 9, the taxpayer must first determine whether
he or she has a source of either business or property income. As has
been pointed out, a commercial activity which falls short of being a business,
may nevertheless be a source of property income. As well, it is
clear that some taxpayer endeavors are neither businesses, nor sources of
property income, but are mere personal activities. As such, the
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 endeavor?
(ii) If
it is not a personal endeavor, is the source of the income a business or
property?
The first stage of the test
assesses the general question of whether or not a source of income exists; the
second stage categorizes the source as either business or property.
...
52 The
purpose of this first stage of the test is simply to distinguish between
commercial and personal activities, and, as discussed above, it has been
pointed out that this may well have been the original intention of Dickson J.'s
reference to "reasonable expectation of profit" in
Moldowan. Viewed in this light, the criteria listed by Dickson J.
are an attempt to provide an objective list of factors for determining whether
the activity in question is of a commercial or personal nature. These
factors are what Bowman J.T.C.C. has referred to as "indicia of
commerciality" or "badges of trade": Nichol, supra, at p.
1218. Thus, 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.
and in paragraphs 54, 55 and 60:
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.
55 The
objective factors listed by Dickson J. in Moldowan, at p. 486, were: (1)
the 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 venture
to show a profit. As we conclude below, it is not necessary for the
purposes of this appeal to expand on this list of factors. As such, we
decline to do so; however, we would reiterate Dickson J.'s caution that this
list is not intended to be exhaustive, and that the factors will differ with
the nature and extent of the undertaking. We would also emphasize 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. 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.
...
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. However, to deny the deduction of losses on
the simple ground that the losses signify that no business (or property) source
exists is contrary to the words and scheme of the Act. Whether or
not a business exists is a separate question from the deductibility of
expenses. As suggested by the appellant, to disallow deductions
based on a reasonable expectation of profit analysis would amount to a case law
stop-loss rule which would be contrary to established principles of
interpretation, mentioned above, which are applicable to the Act. As
well, unlike many statutory stop-loss rules, once deductions are disallowed
under the REOP test, the taxpayer cannot carry forward such losses to apply to
future income in the event the activity becomes profitable. As stated by Bowman
J.T.C.C. in Bélec, supra, at p. 123: "It would be ...
unacceptable to permit the Minister [to say] to the taxpayer 'The fact that you
lost money ... proves that you did not have a reasonable expectation of profit,
but as soon as you earn some money, it proves that you now have such an
expectation.'"
[27] The Federal Court of Appeal, in Nadoryk v. Canada, [2003] F.C.J. No. 1786
(Q.L.), said in paragraph 13 thereof:
13 The Stewart
case did not abolish the test of reasonable expectation of profit but rather
confined its application to cases where there is some personal element to the
activity in question. ...
Analysis
[28] The factual testimony of the Appellant was never
challenged and it is accepted.
[29] The Appellant admitted that there was a personal
element in the activity.
[30] On the strength of the Appellant's statement "I
wanted to be a racecar driver", I find that there was a very strong
personal element in the activity.
[31] Obviously, the Appellant's statement that if he
attracted sponsorship in excess of expenses, the activity would have had a
profit, is correct.
[32] From 1998 to 2003 inclusively, the Appellant had only
one sponsor, namely Loblaws. Before the racing season started in 1998, the
Appellant knew that he only had $18,000 of sponsorship money. The average
annual expenses for the seven preceding years was approximately $27,400, thus
he knew before he even started the racing season that there was going to be a
loss of about $10,000, which turned out to be actually $11,056.
[33] Similarly, in 1999, before the racing season started,
the Appellant knew that he only had $17,500 of sponsorship money. The average
annual expenses for the eight preceding years was approximately $27,500, thus
he knew before he again started the racing season that there would be a loss of
about $10,000, which turned out to be actually $9,497.
[34] Again, in 2000, before the racing season started, he
knew that historically, he would have a loss of approximately $10,000, but it
turned out in actuality to be $13,445.
[35] And again, in 2001, before the racing season started,
he knew that historically, he would have a loss of approximately $7,500, which
proved to be $7,530.
[36] In 2002, with only $10,000 from Loblaws, he still raced
knowing that from his own records, the expenses would, in the most conservative
position, be of at least $20,000 and therefore, would result in a loss of
$10,000, which turned out to be a loss of $15,300.
[37] I am convinced that if the Appellant had not had his
lucrative job as a firefighter and mortgage solicitor, which was giving him in
2000, a gross income of $72,440 and in 2001 a gross income of $76,200, the
activity would have been discontinued many years before 2003.
[38] This car racing hobby was expensive and was financed by
his two other employments.
[39] I am satisfied that hours and effort put into the
activity as a whole and with the solicitation of sponsorship was more than
reasonable.
[40] Obviously, a combination of his ability as a racecar
driver and solicitor of sponsorship could not attract sufficient sponsorship
money to finance this expensive hobby.
[41] In this appeal, planning is a non issue, since the
Appellant knew from his records he had to have sponsorship money in excess of
what he was able to obtain. The $28,200 of sponsorship money in 1997 was the
most he ever obtained.
[42] The total losses for the years 1991 to 2002 inclusively
amounts to approximately $125,300, which averages to approximately $11,400 a
year.
[43] Even though the Appellant described the activity as a
marketing business, at the end of the day, using his motor vehicle and
providing promotional work for sponsors, were all about his desire to drive a
racecar.
[44] I therefore find that the expenses disallowed in 2000
and 2001 were not made or incurred for the purpose of gaining or producing
income from a business or property, as in each year, he knew before the racing
season he could not possibly make a profit.
[45] I also find that all expenses over and above the
sponsorship money received were unreasonable, as the activity was in essence,
the pursuit of the Appellant's hobby of driving a racecar.
[46] For all the above reasons, the appeals are dismissed.
Signed at Toronto, Ontario, this 11th day of February, 2005.
"Gordon Teskey"
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