Date: 19990707
Docket: 97-3379(IT)I
BETWEEN:
GUY THERIAULT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND
97-3381(IT)I
BEVERLEY THERIAULT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Watson, D.J.T.C.C.
[1] These appeals were heard in
Sudbury, Ontario, on June 24, 1999 on common evidence under the
Informal Procedure.
[2] In computing their income for the
1995 taxation year, the Appellants reported a business loss in
the amount of $15,259.08, divided in equal amounts of $7,629.54
each. By Notices of Reassessment dated April 2, 1997, the
Minister of National Revenue (the "Minister")
disallowed the said business losses.
[3] In confirming the reassessments,
the Minister made the following assumptions of fact:
"(a) the Appellant
and his spouse operated a small business known as
"Pathfinders";
(b) during the 1995
taxation year, the Appellant's spouse was a full-time
employee of Zellers;
(c) Pathfinders
commenced operations in 1987;
(d) Pathfinders
provided a variety of products which cater to hunters, fishermen,
hikers and outdoors men;
(e) ninety percent
of Pathfinders' sales came from the sale of maps (i.e. hiking
maps, MNR maps, geological maps and fishing maps);
(f) from 1987
to 1994, Pathfinders operated in shopping malls and/or the
downtown area;
(g) in 1994,
Pathfinders moved into the Appellant's principle residence
situated in a residential area;
(h) Pathfinders is
located at 463 Clinton Avenue, Sudbury, Ontario which is the
residence of the Appellant and his spouse;
(i) the
business operates in 374 square feet and occupies the living room
in the Appellant's residence;
(j) the
Appellant reports 50% of the business losses;
(k) the
Appellant's spouse reports 50% of the business losses;
(l) the
Appellant's calculation of business loss for the 1995
taxation year can be summarized as follows:
1995
Gross
income:
$32,370.01
Cost of Goods
Sold
19,863.72
Gross
Profit
$12,506.29
Expenses:
Advertising
533.45
Bank service
charge
970.60
Business tax, fees etc. 233.60
Delivery,
freight
771.10
Insurance
770.51
Interest
3,419.90
Motor vehicle expenses 4,554.38
Office
expenses
42.60
Supplies
3,582.11
Legal, accounting fees 650.00
Property
expense
2,332.27
Salaries, wages, benefits 1,560.00
Travel
1,959.77
Provincial sales tax
2,042.08
Sub-total
23,422.37
Capital cost allowance
4,343.00
Total business expenses
27,765.37
27,765.37
Net business income
(loss)
($15,259.08)
Appellant's reported share of business loss
(50%) ($ 7,629.54
(m) the business had
experienced losses from 1987 to 1995 as follows:
Year
Gross
Sales
Expenses
Net Loss
1987
$21,892
$45,496
( $23,406)
1988
24,139
45,007
( 20,868)
1989
126,896
133,968
( 7,072)
1990
209,766
239,426
( 29,660)
1991
47,876
95,446
( 47,570)
1992
87,788
115,646
( 27,858)
1993
83,232
126,336
( 43,104)
1994
59,562
155,682
( 96,120)
1995
32,370
47,629
( 15,259)
Total
$693,521
$1,004,636
($311,115)
(n) the Appellant
had no reasonable expectation of profit from the business in the
1995 taxation year."
[4] At the hearing, the agent for the
Appellants admitted all the allegations except for paragraph (n)
above.
[5] The sole issue before the Court
was whether the Appellants had a reasonable expectation of profit
from the business for the 1995 taxation year.
[6] The burden of proof is on the
Appellants; they must establish on a balance of probabilities
that the Minister's reassessments were ill-founded in fact
and in law.
[7] During the 1995 taxation year, Guy
was a full-time employee of Inco Limited while Beverley was
a full-time employee of Zellers. The business started up in 1987;
in 1995, it operated out of their family residence in Sudbury,
Ontario, selling maps and fishing equipment. The store was open
from 9 a.m. to 5:30 p.m. from Monday to Friday and the two
Appellants worked during their free time from their full-time
employment; there was also an employee who minded the business
when they were both away and who lived in the basement of their
residence. The business operated at a loss from 1987 to 1995 and
made a small profit in 1996 when they did not pay any rent, claim
motor vehicle expenses or capital cost allowance.
[8] The two Appellants were the only
witnesses at the hearing. Guy had no previous business experience
but had hunted and fished since he was 16 years old. They had not
prepared a business analysis to project a viable plan for making
a profit. Over the previous 5 years, the business had net losses
of $29,660, $47,570, $27,858, $43,104 and $96,120; it was not
surprising that it had a net loss in 1995.
[9] A reasonable expectation of profit
is an objective test and not just a fanciful dream. The objective
test includes the examination of profit and loss experienced in
the past years; it also examines the operational plan and
background to the implementation of the operational plan
including the planned course of business action; other criteria
include the time spent on the activity, the background, education
and experience of the taxpayer, the time required to establish
the intended business, the presence or absence of ingredients
leading to profits, the record of profits and losses, the cause
of the losses and the flexibility of the taxpayer to make
adjustments in the face of the losses.
[10] I have reviewed the cases provided to
me by counsel for the Respondent and they include Moldowan v.
the Queen, 77 DTC 5213, Attorney General of Canada v.
Michael Mastri and June Mastri, 97 DTC 5420, Zahid
Mohammad v. the Queen, 97 DTC 5503, Charlemagne
Landry v. the Queen, 94 DTC 6499 and Hugill v.
Canada, [1995] F.C.J. No. 655.
[11] Taking into consideration all the
circumstances of these appeals, including the testimony of the
Appellants, the admissions and the documentary evidence, in the
light of the well-established case law, I am satisfied that the
Appellants have failed in their onus of establishing on a balance
of probabilities that during the 1995 taxation year, they had a
reasonable expectation of profit in the operation of the business
known as "Pathfinders".
[12] Accordingly, the appeals are
dismissed.
Signed at Ottawa, Canada, this 7th day of July 1999.
D.J.T.C.C.
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