Date: 19990723

Docket: 98-1914-GST-I

BETWEEN:

KELLY ROSANNE STRACHAN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Hamlyn, J.T.C.C.

[1] The Appellant, Ms. Strachan, appeals by way of the informal procedure a Goods and Services Tax ("GST") assessment dated July 10, 1997 involving the period March 12, 1993 to March 31, 1997.

[2] On October 15, 1992, the Appellant entered into a Contract of Purchase and Sale of a new strata-titled unit at 204-280 East 6th Street in the City of Vancouver for $211,000. The contract stated that the Appellant was responsible for paying GST up to $2,902.50. She paid this amount to the vendor. The transaction was completed on April 28, 1993. Effective March 12, 1993 the Appellant was assigned a GST registration number and was required to file her GST returns on a quarterly basis.

[3] The unit was acquired for mixed residential/commercial purposes 30%/70%. No GST was paid on the 70% part of the property that was to be used as capital property in commercial activities. The Appellant intended to establish a business of manufacturing and selling functional art.

[4] The Appellant filed "nil" GST returns during the assessment period and declared no business income for the years 1993 through 1996. On July 10, 1997, the Appellant was assessed by the Minister of National Revenue (the "Minister") as owing GST on 70% of the purchase price, net of a GST new housing rebate.

[5] Throughout the period of assessment the Appellant was employed by the Canada Post Corporation as a part-time letter carrier.

[6] The stated intention of the Appellant when the property was acquired in partnership with another was to renovate the premises, create a 70% artist work area where the manufacture of functional art would be conducted and, as well, provide for art exhibits.

[7] At inception, the Appellant did not have training in nor the equipment to perform the manufacture of functional art. Therefore, she undertook a period of welding training; she also sought to acquire equipment.

[8] The original partnership dissolved in December 1993 and eventually the Appellant completely bought her partner out in February 1995.

[9] The Appellant formed a new partnership in January 1994 where the new partner (an artist) would mentor the Appellant in the development of functional art skills and the Appellant in return would give the new partner exhibit space for two periods each year (part of May and November). No funds were exchanged under this arrangement. The Appellant also showed her own art to a limited degree during these exhibit periods with the partner's art. To date, the Appellant has not sold any of her manufactured functional art.

[10] The Appellant suffered serious accidents in 1994 and 1995. The extent of the injuries was such that for periods of time she was unable to carry out her functional art intentions.

[11] In September 1996 the Appellant, in another partnership, developed with others a dog biscuit manufacturing process on the Appellant's premises. Test marketing followed in January 1997. In 1998, (outside the assessment period) the total sales were approximately $3,000, the only know costs were the material costs of $1,000. No business calculations or projections were made or presented to the Court with respect to fixed, manufacturing, labour or marketing costs.

[12] Between 1993 and 1997, the Appellant's evidence was there was no income or losses declared for any of the endeavours. Further, no input tax credits ("ITC") were claimed and no GST was submitted with respect to the endeavours.

[13] The Appellant, aside from her investment in the subject property, had limited capital investment resources.

APPELLANT'S POSITION

[14] The Appellant argues that during the period between 1993 and 1997, she was establishing her commercial activity of manufacturing functional art and then manufacturing and selling of pet food.

RESPONDENT’S POSITION

[15] The Respondent admits that the Appellant may have had the intention at the time of purchase to use the property in commercial activities, however, the Respondent submits that the property was never actually used in commercial activities during the 1993-1997 period. The Respondent argues that no commercial activity was established.

ANALYSIS

[16] The Appellant has the onus of proof in challenging her GST assessment.

[17] When tax is paid on a purchase of property used, or intended to be used, in connection with commercial activities, a registrant is entitled to a full refundable credit known as an ITC. The question before the Court is whether the Appellant’s purchase of the property was in connection with commercial activities. The starting point in the Excise Tax Act (the "Act") is paragraph 141.1(3)(a). It reads as follows:

141.1(3) For the purposes of this Part,

(a) to the extent that a person does anything (other than make a supply) in connection with the acquisition, establishment, disposition or termination of a commercial activity of the person, the person shall be deemed to have done that thing in the course of commercial activities of the person; and

[18] Subsection 123(1) of the Act read as follows:

"commercial activity" of a person means

(a) a business carried on by the person (other than a business carried on by an individual or a partnership, all of the members are individuals, without a reasonable expectation of profit), except to the extent to which the business involves the making of exempt supplies by the person,

[19] "Business" is defined in subsection 123(1) of the Act as follows:

"business" includes a profession, calling, trade, manufacture or undertaking of any kind whatever, whether the activity or undertaking is engaged in for profit, and any activity engaged in on a regular or continuous basis that involves the supply of property by way of lease, licence or similar arrangement, but does not include an office or employment.

[20] The definition of "commercial activity" excludes activities individuals engage in where there is no reasonable expectation of profit. An activity may be a 'business' irrespective of whether it is carried on with a view to profit. However, a 'commercial activity' requires that the activity engaged in by an individual have a reasonable expectation of profit. Therefore, individuals pursuing a hobby or a business with no reasonable expectation of profit will not be considered to be engaged in a commercial activity for the purposes of the Act.

WHAT CONSTITUTES REASONABLE EXPECTATION OF PROFIT

[21] 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.

[22] Unless there is a personal element involved, the test should be used sparingly and with latitude favouring the taxpayer.[1] If there is a personal element then the examination requires closer scrutiny. In particular, the test should not be used to second-guess good faith business judgements that are flawed.

[23] Immediate profit is not required, however, certain things must happen in the start-up period. Although every business is entitled to a grace period for start-up costs, it still must be shown that the business is "structured, organized, manned, financed and planned in such a way as to be found to be reasonably capable at that time of yielding a profit in due course."[2] When the business criteria are present the length of time to lead to profitability is a direct function of the endeavour in question.

THE MANUFACTURING AND SELLING OF FUNCTIONAL ART

[24] There is a strong personal element in that the site of the activity is also the personal residence of the Appellant.

[25] The Appellant at the inception had no training or developed skill or experience in the manufacture and sale of functional art. The Appellant undertook training in welding and had eventually in a new partnership developed a mentoring program for herself. The whole period in question was an educational process for the Appellant. Financing was limited and no developed business plan was presented nor were projections offered as to commercial viability. Simply, no substantive evidence was tendered to show a developed or potentially viable business structure. Moreover, the Appellant's intentions were frustrated by health problems resulting from accidents. While artistic endeavours generally require a long-range view and projections in terms of assessing profit potential and commercial viability, the Appellant in this case was still in her training and development stage. I conclude there was insufficient supportive criteria to justify a conclusion of commercial activity within the meaning of the Act.

THE DOG BISCUIT PROJECT

[26] This endeavour was also conducted on the personal residence of the Appellant. Once again, the financing was extremely limited; the four partner individuals each contributed $100. The Appellant, with others, has developed the product. The partner investors have drifted in and out of the project. As indicated, in 1998 (outside the assessment period) the gross revenue was minimal and the Appellant's estimate of the cost of goods sold apparently only covered the material cost.

[27] The endeavour does appear to have the potential for a long-range business direction.

[28] However, I conclude for the late 1996 and early 1997 assessment period in relation to the dog biscuit endeavours, the project was in its embryo development stage and did not have a reasonable expectation of profit or the indicia of commercial viability.

[29] I conclude for the assessment period there was no commercial activity conducted on the premises.

CHANGE IN USE

[30] Section 196 states that where a person acquires property for use to a particular extent in a particular way, then the person will be deemed to have used the property immediately after that time for that intended use. The Appellant intended to use the property 70% commercial use and 30% residential use. What in fact happened was that she did not use it as such and therefore there was a change in use.

[31] Subsection 207(1) deals with the situation where an individual registrant acquired capital property for use in a commercial activity and not primarily for the personal use and enjoyment of the individual, and the individual later begins to use the property exclusively for non-commercial purposes or primarily for the personal use and enjoyment of the individual. At that point in time the individual is deemed to have made a sale of the property (supplied the property to herself) for use otherwise than in commercial activity of the individual. The individual registrant is deemed to have paid and collected GST on the portion of property being sold. When a change of use occurs, the GST liability arises during the reporting period in which the new use actually commences.

[32] The assessment is correct and the imposition of interest and penalties flow as an operation of law.

DECISION

[33] The appeal is dismissed.

Signed at Ottawa, Canada, this 23rd day of July 1999.

"D. Hamlyn"

J.T.C.C.

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