Bonnah v. The Queen, docket 2001-55(IT)I (Informal Procedure)

For the Appellant: The Appellant himself

REASONS FOR JUDGMENT

(Delivered orally from the Bench, at

Toronto, Ontario, on July 23, 2001)

Sarchuk J.

[1]      Infiling his 1995 income tax return, the Appellant claimed advertising and promotion expenses in the amount of $16,264 for 100,000 polybags and an article described as "1PTD six colour-processed reinforced die-cut plates". The Minister of National Revenue disallowed the expenses primarily on the basis that first, they constituted expenses incurred on account of capital rather than being current expenses; and second, that the expenses were not incurred by the Appellant for the purpose of gaining or producing income from a business. With respect to the latter part of the Respondent's submission, it reflected the Minister's position that the Appellant had no reasonable expectation of profit in that year from the business so as to constitute a source of income.

[2]      The appeals involving writers and artists and authors of textbooks and so on are generally quite distinguishable from the rental and dog-kennel cases and others of that ilk. Furthermore, although the principles with respect to rental properties established by various Federal Court of Appeal decisions are of a certain amount of assistance, they are distinguishable because of the substantially different nature of the business. The further down the "artistic" route one goes, the more distinguishable that business may be. That should lead, I believe, to an approach which is true to the concept of what constitutes a "business" but also is one that would be appropriate to apply given the particular facts in this case.

[3]      The Appellant testified that he has been involved in writing and performing music for a number of years. In or about 1993, he commenced writing music for fellow musicians and at some point of time, decided to record and produce his own album. By the end of 1995, he had completed this project and looked for a way to advertise and promote his album and his name. After some reflection, he decided to produce a plastic carrying bag bearing his name and the title of his album. These were distributed to various stores and other venues in appropriate areas. It was for this purpose that the various expenses were incurred.

[4]      In this particular case the Appellant embarked on a recording venture with a good degree of confidence and assurance that given his ability and given his acceptance, as he said, as a singer/writer of music in his community (and I make specific note of the reference to his invitation to Carribana) his project was capable of being profitable. On balance, I have concluded that the Appellant had, as has been observed by the Federal Court of Appeal on a number of occasions, "the confident belief that his endeavour would be successful". Albeit I have not heard any of his recordings, I am satisfied that he was engaged in an activity with which he had a good deal of familiarity and experience and based on his testimony, which I accept, I am equally satisfied that he is qualified both technically and musically in this particular field. I must observe that in certain cases, taxpayers purchasing a house for rental purposes at, by way of example, a cost of $400,000 and financing the amount of $395,000 by way of a mortgage have been successful in their appeals. I have a difficult time distinguishing that type of "reasonable expectation of profit" from the planning and effort that this gentleman put into this particular endeavour. Having said that, I am inclined to conclude, and have concluded, that the Appellant was engaged in and carried on a business in the year under appeal with a reasonable expectation of profit therefrom.

[5]      As to the expenses claimed, I am satisfied that expenses with respect to advertising paid out while a business is in a start-up position and are directed to attracting customers are current expenses. What this taxpayer did was to make an early effort to introduce a particular product to a particular market with the expectation that by having as many people listen to his album/record, it would generate the necessary interest. This was an expense laid out in the carrying out of his plans for a successful business designed to induce the public to ultimately buy his records. The fact that he ran out of money and recognized that this endeavour would not succeed without the infusion of a great deal more capital, does not change his intention nor the reasonableness of his intention at that particular point of time.

[6]      On balance, I have concluded that the expenses incurred are deductible, although not in the total amount. The amount expended for the die-cut plates would appear to be a capital expenditure -- it is difficult in this particular case, because the line between "capital expenditures" and "expenses" is not crystal-clear, but on balance they more appropriately fall into the category of "capital expenditures" and therefore must be treated as such. Mr. Bonnah, I am going to allow your appeal to the extent of $10,200 in the taxation year 1995. I do not need to make any further comments other than to say this is a unique case. In 18 years on the Bench, I have not heard one remotely similar to it. Better luck on your next endeavour.

Signed at Ottawa, Canada, this 3rd day of April, 2003.

J.T.C.C.