Morris v. The Queen, docket 2000-4846-IT-I (Informal Procedure)

Date: 20010712

Docket: 2000-4846-IT-I

BETWEEN:

BRUCE MORRIS,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

O'Connor, J.T.C.C.

[1]            This appeal was heard at Prince George, British Columbia on June 29, 2001 pursuant to the Informal Procedure of this Court.

ISSUE:

[2]            The only issue is whether the Appellant had a reasonable expectation of profit from a fishing guiding operation in the years 1996, 1997 and 1998 with the result that he could deduct the losses incurred in those years from his other income.

[3]            The Reply to the Notice of Appeal states as follows:

3.              In computing income for the 1996, 1997 and 1998 taxation years, the Appellant deducted the amounts of $7,090.00, $12,621.58 and $13,227.89 as business losses, respectively.

4.              The Minister initially assessed the Appellant as filed for the 1996, 1997 and 1998 taxation years on May 15, 1997, May 26, 1998 and August 3, 1999, respectively.

5.              By Notices dated March 20, 2000 the Minister reassessed ... for the 1996, 1997 and 1998 taxation years to disallow the deduction of the Losses.

6.              In so reassessing the Appellant, the Minister relied on the following assumptions of fact:

a)              in 1996 the Appellant began a fishing angling activity (the "Activity");

b)             at all material times, the Appellant was employed full time with BC Rail and was out of town most weekdays;

c)              before starting the Activity, the Appellant prepared no business plan to determine if it would be profitable;

d)             the Activity is undercapitalized;

e)              the Appellant does not have a plan in place to increase revenue from the Activity in the future;

f)              the Appellant has been a hobby fisherman for 45 years;

g)             the Appellant frequently took personal trips to fishing derbies and on fishing outings during the years in issue;

h)             the Activity was not a purely commercial venture;

i)               from 1996 to 1998 the Appellant reported the following income (losses) from the Activity;

Taxation Year	Gross Income	Expenses *	Net Income (Loss)
1996	nil	7,090.00	(7,090.00)
1997	300.00	12,921.58	(12,621.58)
1998	770.00	13,997.89	(13,227.89)

                * refer to Schedule A for a detail analysis of the expenses

j)               the Appellant made minimal efforts to advertise the Activity;

k)              the Appellant charges less than the market rate in Prince George for his services;

l)               the trip log kept by the Appellant identified only one customer in 1997 and 1998;

m)             the Appellant did not have a reasonable expectation of profit from the Activity during the 1996, 1997 and 1998 taxation years; and

n)             the expenses claimed in relation to the Activity were personal or living expenses of the Appellant.

Schedule A provides as follows:

Schedule A

Bruce Morris

First Cast Guiding

Analysis of Losses

for the 1996, 1997 and 1998 taxation years

	1996	1997	1998
Revenue	-	300.00	770.00
less:
Purchases	400.00	-	-
Gross Profit	(400.00)	300.00	770.00
less: Expenses
Advertising	-	178.86	88.73
Business tax	-	1,074.40	385.20
Delivery, Freight and Express	-	-	13.88
Fuel Costs	214.00	-	1,169.81
Insurance	-	1,482.00	799.92
Interest	-	1,384.69	1,145.05
Maintenance and Repairs	-	1,325.02	2,977.77
Management Fees	1,227.00	-	-
Office Expense	63.00	-	-
Supplies	545.00	795.28	331.07
Legal, Accounting or other Professional Fees	100.00	125.00	214.00
Travel	205.00	86.00	54.04
Telephone and Utilities	453.00	482.35	466.13
Capital Cost Allowance	950.00	4,210.00	3,454.14
Other	2,933.00	-	-
Automobile Expenses	-	1,777.98	2,898.15
Total Expenses	6,690.00	12,921.58	13,997.89
Net Income/(Loss)	(7,090.00)	(12,621.58)	(13,227.89)

...

C.             STATUTORY PROVISIONS RELIED ON

8.              He relies on sections 3, 9 and 67, subsection 248(1), and paragraphs 18(1)(a) and 18(1)(h) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (the "Act") for the 1996, 1997 and 1998 taxation years.

[4]            The evidence reveals that the Appellant did have some sort of business plan which he filed as exhibit A-1 and which is entitled "Angling Guide Operating Plan". Apparently this relates to an application for a licence and the application date is 96-05-11 thus indicating that the fishing guide operation commenced in the spring of 1996. However, there was no revenue in 1996 and only $300 in 1997 and $770 in 1998.

[5]            The Appellant did some advertising by listing in the yellow pages and in 1999 he established a website. He indicated that the website for his name only had attracted in excess of 3,000 hits. However, none of the hits produced any fishing activity or business. He testified further that he established a toll free telephone number in the year 2000.

[6]            In the years in question, the Appellant had only one customer, a Mr. Zigmund, and possibly one other customer but the Appellant could not positively identify that other possible customer.

[7]            The Appellant also testified that in addition to the fishing guide operation, he did work for the R.C.M.P., the Prince George Safety and Rescue Authority and one other authority. This activity involved essentially security and safety matters plus retrieval of certain items (including human bodies) from the water. However no breakdown was supplied as to the guiding revenues and the revenues derived from these authorities.

[8]            The Appellant, aged 47, had worked for CP Rail for approximately 18 years. In the years in question his work at CP Rail, which involved maintenance and repair of bridges, occupied as a rule 40 hours per week. He was entitled to five weeks of holidays.

[9]            He carries on the guiding operation in the summer months. It is done from his residence where his three boats are stored.

[10]          He admits having enjoyed fishing every since he was able to handle a fishing rod.

[11]          Exhibits R-8 and R-9 filed by Mark Wensley, the auditor on this file, indicate that in 1999 the gross business income was $400 and the net business loss was $13,335, and in 2000 the gross business income was $1,000 and the net business loss was $17,611.

[12]          The allegation in the Reply to the effect that the Appellant attended several fishing derbies is evidenced more completely by Exhibit R-6 also filed by the auditor.

[13]          The Appellant denies that he advised the auditor that he was starting up the business with the intention of getting to it more completely after his retirement. He stated that because of recent lay-off experiences at BC Rail he might well be laid off next year at which time he would be able to devote much more time to the operation. He maintained further that the operation could well extend beyond the spring, summer and fall periods to include winter ice fishing. However, in the years in question the operation was very limited as described above.

[14]          After the auditor had given his testimony the Appellant requested permission of the Court to give further evidence through one Rudolph-Ronald Chmelyk. This witness did not give any factual evidence but rather advanced the proposition that the Income Tax Act was not valid or at least not sufficiently valid to allow the Minister of National Revenue (the "Minister") to disallow the losses in question. The witness referred to subsections 231.2(1) and 231.2(2) of the Income Tax Act.

[15]          In reviewing the Statement of Income and Expenses set forth in Schedule "A" to the Reply the Appellant on cross-examination was unable, in almost every instance, to explain what the expenses consisted of and constantly stated that for income tax matters he relied on his accountant and that that was the reason he was unable to answer the questions put to him. The accountant was not called as a witness.

SUBMISSIONS OF THE APPELLANT:

[16]          The Appellant submitted that the treatment accorded him by the Minister was unfair, unreasonable and unjust. Further, the Minister had no authority to tell him how to run his business and also that at least with respect to his business the Income Tax Act had no application.

SUBMISSIONS OF COUNSEL FOR THE RESPONDENT:

[17]          Counsel referred to the applicable provisions of the Income Tax Act which are referred to in the Reply. Counsel also referred to the usual authorities, namely Moldowan v. Her Majesty the Queen, a Supreme Court of Canada decision at 77 DTC 5213, Tonn v. R., [1996] 1 C.T.C. 205 and Mastri v. R., [1997] 3 C.T.C. 234. Counsel also referred to certain other decisions specifically related to chartering activities and/or fishing charter activities including in particular Mintenko v. R., a decision of Beaubier, T.C.J. dated February 13, 2001, Enright v. R., another decision of Beaubier, T.C.J. dated October 31, 2000 and a decision of Rowe, D.J.T.C., reported at [1998] 2 C.T.C. 3222. Without reviewing those decisions in detail, each of them held that the particular activity carried on did not have a reasonable expectation of profit and the appeals were dismissed.

ANALYSIS AND DECISION:

[18]          In my opinion the Appellant in these appeals did not, in the years in question, have a reasonable expectation of profit. The following are my reasons:

1.              The fact that in the years in question the Appellant had only one regular client and possibly one other and the revenues were only $0 in 1996, $300 in 1997 and $770 in 1998 against which the Appellant sought to deduct all of the expenses set forth in Schedule A to the Reply with the result that losses were produced of $7,090 in 1996, $12,621.58 in 1997 and $13,227.89 in 1998 and continued in 1999 and 2000 strongly indicate that there was no reasonable expectation of profit.

2.              The Appellant's full-time employment with CP Rail which gave him an employment income in the years in question in the range of $50,000 against which the losses were applied indicates that the Appellant had very little time to devote to the fishing guide operation.

3.              Given the reasons set forth in paragraph 1 and 2 above, I do not believe this is a proper case for the application of a reasonable start-up period. In the years in question, there simply was absolute minimal activity and operations.

4.              The Appellant's inability to analyze in detail the expenses set forth in said Schedule A militates against him.

5.              In income tax appeals the burden of proof to rebut or destroy the assumptions of the Minister lies with the Appellant and the Appellant in this case has not discharged that burden.

6.              There was a strong personal element involved. The Appellant has always enjoyed fishing and entered several fishing derbies.

7.              The position of the Appellant that the Income Tax Act is either invalid or at least cannot be used to deny him the losses in question is without foundation. Subsections 231.2(1) and 231.2(2) provides as follows:

(1)            Notwithstanding any other provision of this Act, the Minister may, subject to subsection (2), for any purpose related to the administration or enforcement of this Act, by notice served personally or by registered or certified mail, require that any person provide, within such reasonable time as is stipulated in the notice,

(a)            any information or additional information, including a return of income or a supplementary return; or

(b)            any document.

(2)            The Minister shall not impose on any person (in this section referred to as a "third party") a requirement under subsection (1) to provide information or any document relating to one or more unnamed persons unless the Minister first obtains the authorization of a judge under subsection (3).

                I fail to see how these provisions are applicable.

[19]          For all of the above reasons, the appeals are dismissed.

                Signed at Ottawa, Canada, this 12^th day of July, 2001.

"T. O'Connor"

J.T.C.C.

COURT FILE NO.:                                                 2000-4846(IT)I

STYLE OF CAUSE:                                               Bruce Morris v. The Queen

PLACE OF HEARING:                                         Prince George, British Columbia

DATE OF HEARING:                                           June 29, 2001

REASONS FOR JUDGMENT BY:      The Honourable Judge Terrence O'Connor

DATE OF JUDGMENT:                                       July 12, 2001

APPEARANCES:

               

For the Appellant:                                                 The Appellant himself

Counsel for the Respondent:              Johanna Russell

COUNSEL OF RECORD:

For the Appellant:                

Name:                     

Firm:                       

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2000-4846(IT)I

BETWEEN:

BRUCE MORRIS,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on June 29, 2001 at Prince George, British Columbia, by

the Honourable Judge Terrence O'Connor

Appearances

For the Appellant:                                         The Appellant himself

Counsel for the Respondent:                         Johanna Russell

JUDGMENT

          The appeals from the reassessments made under the Income Tax Act for the 1996, 1997 and 1998 taxation years are dismissed in accordance with the attached Reasons for Judgment.

          Signed at Ottawa, Canada, this 12^th day of July, 2001.

"T. O'Connor"

J.T.C.C.