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Citation: 2005TCC228
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Date: 20050330
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Docket: 2004-2868(IT)I
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BETWEEN:
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GERMAIN DOMINIQUE MAKAR,
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Appellant,
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And
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
BowieJ.
[1] These appeals are brought from
reassessments for income tax for the taxation years 1999 and
2000. In computing his income for those years under section 3 of
the Income Tax Act[1] (the Act), the Appellant claimed to be entitled
to deduct certain business losses from the salary that he earned
working as an employee of the city of Winnipeg. By the
reassessments that are now under appeal, the Minister of National
Revenue disallowed the deduction of those losses on the basis
that Mr. Makar was not engaged in a business during those two
years as he had incorporated a company called Smart Charge
Inc. (SCI) to carry on the business, and so any losses sustained
are those of SCI and not the Appellant. The Minister also takes
the position, in the alternative, that the expenses that gave
rise to the losses claimed by the Appellant are not related to
any business but are simply personal or living expenses of the
Appellant, the deduction of which would in any event be
prohibited by paragraph 18(1)(h) of the Act. For
the reasons that follow, I am of the view that the Minister is
correct as to both his primary and alternative contentions. The
appeals must therefore be dismissed.
[2] There is no doubt that the
Appellant developed a useful invention during the latter part of
the 1990s. He filed an application for a patent in the United
States in July 1998, and in Canada in July 1999, for an invention
described as a pulse modified invariant current battery charging
method and apparatus (the Smart Charge). In due course the patent
was granted. As the Appellant described it in the course of his
evidence, the device that he invented is inserted in the circuit
used to charge rechargeable batteries of all kinds, where it has
the salutary effect of increasing the efficiency and the useful
life of the battery. The Minister does not dispute the invention
or its usefulness. Nor is there any dispute that at all relevant
times the Appellant was the owner of the patent for the Smart
Charge. The issue arises with respect to the manner in which the
Appellant chose to exploit his invention. Because the Appellant
accepted all the assumptions of fact that the Minister relied on
in reassessing him, I shall reproduce in full paragraph 10 of the
reply to the notice of appeal where these are found.
10. In so reassessing the
Appellant for the 1999 and 2000 taxation years and in so
confirming those reassessments, the Minister assumed the same
facts as follows:
(a)
the Appellant is a mechanic employed by the City of Winnipeg;
(b)
in or around 1998, the Appellant developed and patented a battery
charging device based on the Pulse Volt System which he called
the Smart Charge (hereinafter the "Smart Charge");
(c)
the patents for the Smart Charge are owned by the Appellant;
(d)
the Appellant is 100% shareholder of Smart Charge Inc.
(hereinafter the "Corporation");
(e)
the Corporation was incorporated in 1998;
(f)
the Corporation's business activity is manufacturing electronic
devices;
(g)
in 1998, the Appellant assigned the licensing rights to the Smart
Charge to the Corporation;
(h)
commencing October 1, 2002 the Corporation was required to pay
the Appellant $100.00 per year for assigning the licensing rights
to the Smart Charge;
(i)
the Corporation granted the exclusive right to market the Smart
Charge to Nuvomedia Corporation Ltd. (hereinafter
"Nuvomedia");
(j)
the Corporation was responsible for marketing the Smart Charge
during the 1999 and 2000 taxation years;
(k)
royalties that were to be paid by Nuvomedia in respect of the
Smart Charge were payable to the Corporation;
(l)
the Corporation reported gross sales of $6,194.00 and $1,017.00
for the fiscal periods ending December 22, 1999 and December 22,
2000, respectively;
(m)
the gross sales reported by the Corporation were in respect of
the Smart Charge;
(n)
the licensing agreement between the Corporation and Nuvomedia
prohibits the Appellant from manufacturing and selling the Smart
Charge;
(o)
the Appellant claimed business losses from the business named
Smart Charge Inc. of $10,233.52 and $7,680.93, calculated as
follows:
(i)
no gross income in either year; and
(ii)
expenses of $10,233.52 and $7,680.93 in the 1999 and 2000
taxation years, respectively, (hereinafter the "Expenses") a
detailed in Schedule A which forms part of the Reply to the
Notice of Appeal (hereinafter "Schedule A");
(p)
the Appellant indicated the business activity relating to the
business losses claimed by the Appellant in the 1999 and 2000
taxation years to be "battery conditioning device";
(q)
as part of the business losses claimed in 1999, the Appellant
claimed:
(i)
80% of his vehicle expenses consisting of repairs fuel,
registration, insurance, parking and car washes;
(ii)
travel and lodging expenses at 100% and included camping fees and
hotel charges for himself and his spouse;
(iii)
60% of the Appellant's Mastercard interest ($1,177,21 x 60% =
$706.33) as start-up loan interest;
(iv)
advertising of $3,534.00 representing the "retail value" of 31
devices he stated were installed in potential customers'
vehicles;
(r)
the total transactions on the Appellant's Mastercard were
$7,962.12 of which $5,123.33 were for food, meals, travel and
personal purchases;
(s)
the Appellant does not have a separate telephone line in his
home; and
(t)
any work performed by the Appellant is done on behalf of the
Corporation.
With respect to subparagraph 10(b), the Appellant testified
that the patent application was filed in 1998, and that the
patent is for a pulse current system rather than a pulse
volt system. As to subparagraph 10(k), he accepted that it
correctly states the payment provision of the contract, but he
added that no royalties were in fact paid. Otherwise, the
Appellant agreed with the Minister's assumptions of fact.
[3] The Appellant stated candidly in
his evidence that business is not his forte, and so it was on the
advice of others that he structured the commercial exploitation
of his invention in the way that he did. No doubt he and his
advisors expected that there would be significant royalty revenue
flowing into the SCI in short order. Unfortunately, this did not
happen. For reasons that I need not go into here, the marketing
of the invention proved more difficult than the Appellant had
hoped. In the meantime, however, he expended considerable time
and effort in his attempts to improve the invention and to find a
market for it. He also expended some money on these efforts, and
that is the source of the losses that he claims to have suffered
in 1999 and 2000. In accounting for these expenditures, the
Appellant seems to have relied on the advice of a self-styled tax
accountant or tax preparer. Like so many people who purchase and
follow the advice offered by tax preparers who have no
professional accreditation, the Appellant was not well served. As
the chief executive of SCI, the Appellant signed and filed its
income tax returns for 1999 and 2000, as well as his own. As I
understood his evidence, all four returns were prepared for him
by the tax preparer. All the revenues were declared by SCI; most
of the expenses were claimed on the personal returns of the
Appellant in a statement of business income that is said to
reflect the results of his personal proprietorship, which he
described as "Smart Charge Inc.". Smart Charge Inc., however, was
a separate entity, and there is no doubt that by 1999 it was
entitled to market the invention, and to receive any revenues
that the licensing of it might generate. Similarly, any expenses
arising in the course of marketing it were SCI's expenses. The
only financial records of SCI to be found in the evidence are
copies of hand-written statements of profit and loss for the
years ended December 22, 1999 and December 22, 2000 and
hand-written balance sheets as of those two dates that were
extracted from SCI's income tax returns. They show modest
expenses, and even more modest revenues arising from its
marketing efforts. Clearly, the expenses of marketing that the
Appellant claimed as his own, if they were deductible at all,
were deductible by SCI. This, of course, would have resulted in
that company suffering even larger losses than it declared for
the two years.
[4] Furthermore, in my view none of
the amounts claimed by the Appellant, with one possible
exception, can properly qualify as being anything other than
personal expenses. For 1999, the Appellant claimed expenses
totalling $10,233.52. The largest amount was $3,994.60 for
automobile expenses. In 2000, he claimed $4,022.42 for automobile
expenses. The Appellant's evidence was that these claims were
made up of 80% of the expense of gasoline and oil changes for his
personal vehicle for each of these years. Although all the use of
the vehicle was for personal trips, he claimed to be entitled to
this deduction because he had installed one of his charging
devices in his vehicle and was using it to test improvements that
he hoped to make to the invention. The 80% ratio was apparently
chosen arbitrarily by him. Mr. Makar also included travel expense
of $413.75 in 1999, which he said was the cost of trips to
Kenora, Ontario and Dauphin, Manitoba where he stayed for some
days. These trips, he said, were made to test the device in
different climatic conditions. He also charged against his
"business" $739.18 in 1999 and $240.19 in 2000 for interest.
These amounts, he said, were the interest on his credit card, and
they apparently related in some way to his travel expenses. He
also included his entire telephone bill, $1,074.10 in 1999 and
$704.63 in 2000, although he had only one telephone line in his
house. He offered no basis on which the telephone use could be
apportioned between his family's personal use and the legitimate
business of SCI. The two expenses that, if they could be
substantiated, might reasonably be charged to the business of SCI
(but not the Appellant) are $3,534.00 for advertising in 1999 and
$2,663.69 in 2000 which he said related to subscriptions having
to do with his research. On cross-examination, the Appellant
admitted that the "advertising" expense consisted of some 30
chargers that he had installed free in various vehicles in an
attempt to attract buyers. The $3,534.00 was calculated on the
basis of the retail price for these, although he was vague as to
what the precise retail price was. He stated that they cost
$30.00 each to manufacture, and if I had found that he was
entitled to treat these as his own business expense rather than
that of SCI then I would not have allowed him more than $900.00.
As to the amount for subscriptions, there is no evidence as to
the actual items purchased or their cost.
[5] Quite apart from the fact that the
Appellant had no business in 1999 and 2000, I find that the
expenses claimed are almost entirely personal. Some small part
might be justified as legitimately relating to the continuing
refinement of the Appellant's invention, but even that could only
be regarded as incremental to the value of the capital asset, the
patent, and not as being on current account. As the Appellant
testified that he would never sell his invention, as opposed to
licensing its use, the decision of the Supreme Court of Canada in
M.N.R. v. Freud[2] can have no application here.
[6] The appeals will be dismissed.
Signed at Ottawa, Canada, this 30th day of March, 2005.
Bowie J.
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