Dufour v. The Queen, docket 2000-1784-IT-I (Informal Procedure)

Date: 20010516

Docket: 2000-1784-IT-I

BETWEEN:

JEAN-CLAUDE DUFOUR,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

Watson, D.J.T.C.C.

[1]            This appeal was heard under the informal procedure at Montréal, Quebec, on May 4, 2001.

[2]            In computing his income for the 1995, 1996 and 1997 taxation years, the appellant claimed the amounts of $9,508, $6,390 and $4,075 respectively as losses from carrying on a business.

[3]            By Notices of Reassessment dated January 18, 1999, the Minister of National Revenue (the "Minister") disallowed the amounts of $9,508 and $6,390 previously allowed for the 1995 and 1996 taxation years.

[4]            By Notice of Assessment dated March 18, 1999, the Minister disallowed the amount of $4,075 claimed in respect of the 1997 taxation year.

[5]            On January 28, 2000, the Minister confirmed the Notices of Reassessment and Assessment dated January 18 and March 18, 1999.

[6]            In making and confirming the reassessments, the Minister made the following assumptions of fact in particular:

[TRANSLATION]

(a)            the appellant has made a career in the Public Service of Canada as a director of various departments within Employment and Immigration Canada in Quebec;

(b)            the appellant was also a member of the Royal Canadian Mounted Police for one year;

(c)            during the years in issue, the appellant allegedly operated a business the activities of which were as follows:

(i)             finding financing and/or taking part in the development of projects in the West Indies, the Caribbean and Africa;

(ii)            acting as an intermediary in transactions relating to the import and export of various goods;

(iii)           selling land in the Dominican Republic;

(d)            the appellant operated his alleged business under the firm name "Info-Caraïbes, Import - Export";

(e)            the appellant established no action plan for that alleged business;

(f)             the appellant has very little training in the operations of the alleged business;

(g)            since the start of the alleged business in 1990, the appellant has only incurred losses;

(h)            since the start of the alleged business, the appellant has invested only $1,413;

(i)             there has been no growth in the gross income of the alleged business since 1990; gross income has not changed and remains at zero;

(j)             the appellant has devoted very little time to his alleged business;

(k)            the appellant had no reasonable expectation of earning a profit in carrying on his alleged business;

(l)             in an initial audit, the Minister gave the appellant the benefit of the doubt with respect to a reasonable expectation of earning a profit in carrying on the business for the 1992, 1993 and 1994 taxation years;

(m)           the losses claimed in respect of his alleged business constituted personal expenses for the years in issue;

(n)            in the alternative, if the Court were to conclude that a business was carried on by the appellant, the audit of the expenses claimed by the appellant during the 1995 and 1996 taxation years yielded the following results:

(i)             the legal fees claimed in 1995 and 1996 were disallowed because they were incurred to defend the appellant's reputation;

(ii)            the notarial fees claimed in 1995 were disallowed because they were not connected to the appellant's business;

(iii)           based on his audit, the Minister revised the business losses for the 1995 and 1996 taxation years and changed them to $1,207 and $1,200 respectively (see Appendices 1 and 2).

[7]            At the hearing, the agent for the appellant admitted the facts alleged in subparagraphs (a), (b) and (l) and denied those alleged in the other subparagraphs of paragraph 14 of the Reply to the Notice of Appeal.

[8]            The burden of proof is on the appellant. He must show on the balance of evidence that the reassessments are unfounded in fact and in law. Each case stands on its own merits.

[9]            Extensive case law has addressed the meaning of the expression "reasonable expectation of profit", including the decisions mentioned below.

[10]          In Moldowan v. Her Majesty the Queen, [1978] 1 S.C.R. 480, Dickson J. of the Supreme Court of Canada held at page 485:

Although originally disputed, it is now accepted that in order to have a "source of income" the taxpayer must have a profit or a reasonable expectation of profit. Source of income, thus, is an equivalent term to business . . . If the taxpayer in operating his farm is merely indulging in a hobby, with no reasonable expectation of profit, he is disentitled to claim any deduction at all in respect of expenses incurred.

[11]          In Landry v. Her Majesty the Queen, F.C.J., No. A-392-93, July 5, 1994 (94 DTC 6625), Décary J.A. of the Federal Court of Appeal wrote as follows at pages 6625 and 6626:

There comes a time in the life of any business operating at a deficit when the Minister must be able to determine objectively, after giving someone a head start for a number of years, as the case may be, that a reasonable expectation of profit has turned into an impossible dream. . . .

. . .

Apart from the tests set out by Mr. Justice Dickson, the tests that have been applied in the case law to date in order to determine whether there was a reasonable expectation of profit include the following: the time required to make an activity of this nature profitable, the presence of the necessary ingredients for profits ultimately to be earned, the profit and loss situation for the years subsequent to the years in issue, the number of consecutive years during which losses were incurred, the increase in expenses and decrease in income in the course of the relevant periods, the persistence of the factors causing the losses, the absence of planning, and failure to adjust. Moreover, it is apparent from these decisions that the taxpayer's good faith and reputation, the quality of the results obtained and the time and energy devoted are not in themselves sufficient to turn the activity carried on into a business.

[12]          In Tonn v. Canada, [1996] 2 F.C. 73, Linden J.A. of the Federal Court of Appeal stated at pages 103 and 104:

. . . However, where circumstances suggest that a personal or other-than-business motivation existed, or where the expectation of profit was so unreasonable as to raise a suspicion, the taxpayer will be called upon to justify objectively that the operation was in fact a business. Suspicious circumstances, therefore, will more often lead to closer scrutiny than those that are in no way suspect.

. . .

Another listing of the factors to be assessed was set out in Sipley (P.D.) v. Canada [[1995] 2 C.T.C. 2073]:

The objective test includes an examination of profit and loss experience over past years, also an examination of the operational plan and the background to the implementation of the operational plan including a planned course of action. The test further includes an examination of the time spent in the activity as well as the background of the taxpayer and the education and experience of the taxpayer.

[13]          In McKinney v. The Queen, [2000] F.C.J. No. 453, Robertson J. of the Federal Court of Appeal stated in his judgment delivered orally from the bench on April 3, 2000, as follows:

The applicant, a retired university professor, claimed accumulated expenses of $47,000 against revenue of $50 over the four taxation years in question. The expenses were incurred in regard to a number of research endeavours which the applicant hoped would lead to publications. In fact no publication resulted. In our respectful view, Judge Mogan did not err in holding that the applicant did not have a reasonable expectation of profit. Accordingly, the application should be dismissed.

[14]          Having regard to the case law and to all the circumstances of this appeal, including the appellant's testimony and the testimony of the Revenue Canada appeals officer, the admissions and the documentary evidence, the Court is satisfied that the appellant was unable to show on the balance of evidence that he had a reasonable expectation of profit during the years in issue and that the reassessments of January 18, 1999, were unfounded in fact and in law.

[15]          Therefore, the appeal is dismissed.

Signed at Ottawa, Canada, this 16th day of May 2001.

"D. R. Watson"

D.J.T.C.C.

Translation certified true on this 5th day of December 2002.

Sophie Debbané, Revisor

APPENDIX 1

1995

Re: Info-Caraïbes Import-Export                       Claimed                  Allowed Disallowed

Expenses:

Rent: 25% of the following expenses:                                $1,823.36                                 $ 614.23 $1,209.13

Snow removal                                                        1               $    0.00                    $    0.00    $    0.00

Loan principal and interest                  2               $5,244.00                                 $    0.00    $5,244.00

Municipal taxes                                                     3               $ 928.70                  $ 928.70 $    0.00

School taxes                                                           4               $ 241.32                  $ 241.32 $    0.00

Heating                                                                   5               $ 496.43                  $ 496.43 $    0.00

Electricity                                                               6               $    0.00                    $ 407.46 $ (407.46)

Insurance                                                               7               $ 383.00                                $ 383.00                $    0.00

                                                                                                $7,293.45                                 $2,456.91                 $4,836.54

Professional fees:

Legal                                                                       8               $3,193.60                                 $    0.00     $3,193.60

Notarial                                                                   9               $3,745.34                                 $    0.00     $3,745.34

Accounting                                                            10             $1,139.55                               $ 500.00                 $ 639.55

                                                                                                $8,078.49                                 $ 500.00 $7,578.49

Representation:

Telecommunications - 90% business               11             $1,001.18                                 $ 278.11 $ 723.07

Office supplies                                                      12             $ 131.05                  $ 131.05 $    0.00

Associations and dues                                        13             $ 207.60                  $ 207.60 $    0.00

CCA on equipment                                               14             $ 90.00                                 $ 90.00                 $    0.00

                                                                                                $1,429.83                                 $ 706.76 $ 723.07

Automobile - 50% for business purposes:

CCA

Insurance

Registration

Maintenance and repairs

Gas and oil

Parking

Business loss                                                                        $11,331.68                               $1,820.99                 $9,510.69

Less: rental expenses (home office)                   $ 1,823.36                              $ 614.23                $1,209.13

Business loss reduced by rental expenses                       $ 9,508.32                                $1,206.76                 $8,301.56

APPENDIX 2

1996

Re: Info-Caraïbes Import-Export                       Claimed                  Allowed Disallowed

Expenses:

Rent: 25% of the following expenses:                                $3,280.64                                 $ 867.83 $2,412.82

Snow removal                                                        1               $ 250.00                                 $    0.00    $ 250.00

Loan principal and interest                  2               $ 9,401.27                                $    0.00    $9,401.27

Municipal taxes                                                     3               $ 1,248.80                                $1,248.80                 $    0.00

School taxes                                                           4               $ 386.42                                 $ 386.42 $    0.00

Heating                                                                   5               $ 967.29                                 $ 967.29 $    0.00

Electricity                                                               6               $ 455.68                                 $ 455.68 $    0.00

Insurance                                                               7               $ 413.11                               $ 413.11                $    0.00

                                                                                                $13,122.57                               $3,471.30                 $9,651.27

Professional fees:

Legal                                                                       8               $2,850.00                                 $    0.00    $2,850.00

Notarial                                                                   9               $    0.00                    $    0.00    $    0.00

Accounting                                                            10             $ 600.00                                $    0.00 $ 600.00

                                                                                                $3,450.00                                 $    0.00    $3,450.00

Representation:                                                     11             $ 300.00                  $    0.00    $ 300.00

Telecommunications - 90% business               12             $ 997.90                  $ 277.20 $ 720.70

Office supplies                                                      13             $ 73.16                   $ 73.16 $    0.00

Associations and dues                                        14             $ 79.61                   $ 79.61 $    0.00

CCA on equipment                                               15             $ 72.00                  $    72.00 $    0.00

                                                                                                $1,522.67                                 $ 501.97 $1,020.70

Automobile - 50% for business purposes:      $1,417.93                                 $ 698.46 $ 719.47

CCA                                                                        16             $1,242.00                                 $ 1,200.00                $ 42.00

Insurance                                                               17             $ 397.95                  $ 397.95 $    0.00

Registration                                                           18             $ 224.00                  $ 224.00 $    0.00

Maintenance and repairs                                     19             $ 371.90                  $ 371.90 $    0.00

Gas and oil                                                             20             $ 550.00                  $ 550.00 $    0.00

Parking                                                                    21             $ 50.00                  $    50.00                 $    0.00

                                                                                                $2,835.85                                 $ 2,793.85                $ 42.00

Business loss                                                                        $9,671.24                                 $ 2,068.26                $7,602.98

Less: rental expenses (home office)                   $3,280.64                               $ 867.83                $2,412.82

Business loss reduced by rental expenses                       $6,390.60                                 $ 1,200.43                $5,190.17

[OFFICIAL ENGLISH TRANSLATION]

2000-1784(IT)I

BETWEEN:

JEAN-CLAUDE DUFOUR,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on May 4, 2001, at Montréal, Quebec, by

the Honourable Deputy Judge D. R. Watson

Appearances

Agent for the Appellant:                                     Germain Pouliot

Counsel for the Respondent:                              Mounes Ayadi

JUDGMENT

                The appeal from the assessments made under the Income Tax Act for the 1995, 1996 and 1997 taxation years is dismissed in accordance with the attached Reasons for Judgment.

Signed at Ottawa, Canada, this 16th day of May 2001.

"D. R. Watson"

D.J.T.C.C.

Translation certified true on this 5th day of December 2002.

Sophie Debbané, Revisor

[OFFICIAL ENGLISH TRANSLATION]