Date: 19990922
Dockets: 98-1271-IT-I; 98-1882-IT-I
BETWEEN:
RAYMOND KEERY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowman J.T.C.C.
[1] These appeals are from assessments for the 1993, 1995 and
1996 taxation years. The issue for each year is whether the
appellant was carrying on a business, the losses from which are
deductible in computing his income. A second question had to do
with a claim in 1993 for a disability tax credit in respect of
his wife, but the appellant did not proceed with that issue.
[2] The appellant has been a high school teacher for about 24
years. In 1985 or 1986 he and a partner, Peter Cullen, started a
business on Highway 11 south of Orillia. The business involved
the production and sale of tackle and gear for ice fishing. They
rented a store and kept ponds in which minnows (shiners) were
stocked until sold as bait. The fishing tackle that they produced
was also sold through Canadian Tire stores.
[3] In addition to the sale of tackle and bait they also
rented ice huts to fishermen who stayed in them on the ice while
fishing.
[4] For this purpose they had borrowed $20,000 from the
bank.
[5] In August and September 1990 the appellant's partner
Cullen sold the tackle business to one Clarke for $8,000, the
licence for Lake Couchiching to Robert Battegello, for $5,025,
six ice huts for $3,000 and bait for $3,400. He appropriated
these funds and disappeared to England leaving his wife and
children. He left the appellant solely liable for debts to the
bank ($23,668), the Ministry of Natural Resources ($8,081), an
amount owing on a leased but dilapidated GMC truck
($11,934.78).
[6] In the result the appellant was left with no assets except
a commercial licence and 14 ice huts and debts of over
$40,000.
[7] In 1991 he tried to pick up the pieces and start over with
a view to earning enough money to recoup his losses and pay off
his debts. He built 6 more ice huts and sold the business (or at
all events such of it as was left) to Battegello for $3,000 down
and $11,000 over two years.
[8] He continued selling worms and minnows. He built a cooler
on the property of Paul Srigleys. He advertised the rental of ice
huts through a Pizza Pizza outlet. He appears to have developed a
sort of association with Battegello in an attempt to assist
Battegello to earn some money to pay him what he owed. This was
to no avail. Battegello developed heart problems and moreover
Battegello's partner left him in somewhat the same
circumstances as Cullen left the appellant. It seems the
appellant, a respectable and honest high school teacher, had the
misfortune to become involved with people who were at best
unreliable and at most larcenous. There was also some vague
allusion to another individual who was charged with murder, but
his role in this saga is too nebulous to merit more than passing
reference.
[9] During 1992, the appellant tried to collect from
Battegello and obtained a writ of seizure against him. However
the cheques which Battegello issued to him bounced. In the
winter, Battegello sold to one R. Wroe, but nothing was obtained
by the appellant from this sale.
[10] Battegello had stored a large amount of bait at Wheatley,
Ontario. He went to collect it in April and was transporting it
in a large tank for the Orillia Spring Perch Derby. The truck hit
a deer on the highway and hundreds of gallons of minnows were
strewn all over the highway and lost. Undaunted, the appellant
took the truck back to Wheatley to get more minnows but the rear
tire came off. In the result no bait was delivered.
[11] In 1993, the appellant succeeded in reaching a settlement
with Battegello and ultimately was paid off in 1996. He continued
to try to develop the bait business but in that year as the
result of high water and overfishing, no bait was caught. This
situation continued into 1994. He continued to try to establish
the minnow, worm and leech business in Michigan, Wisconsin and
Minnesota, but without success. He was assisted by three good
friends, Nick Kruit, John and Paul Srigleys.
[12] He conditionally sold the business to N. Kruit for
$15,000 but that deal fell through. In 1995, the supply of
minnows simply dried up. To add to his problems, his accountants
failed to file a notice of objection to the 1994 assessment.
[13] In 1995 and 1996, he tried to diversify into other lines
of business, largely because he needed the money to support his
son, who is hydrocephalic and requires care and supervision.
[14] The other businesses that he tried to get into in 1995
and 1996 were CD Rom Technology (Leadership & Employability
Clubs of Canada), Amway and Software sales — Renco
Technologies Solid Edge. In 1996, he broke his leg and was off
work for three months. In that year he also built 10 outhouses
for the Haliburton Forest & Wild Life Reserve.
[15] I have set out in some detail the almost incredible
litany of misfortunes that befell him. They would have crushed a
lesser man. Was he carrying on a business or businesses? On this
point, I entertain no doubt whatever. He was engaged in a
commercial undertaking, the sole object of which was to earn
income. There was no personal element involved. It is impossible
to believe that chasing around the waterways of Ontario looking
for minnows, frogs and leeches which it is intended to sell at a
profit can contain any component of self gratification or
personal enjoyment other than the prospect of earning a profit.
His activity falls within the definition of business in section
248 as "an undertaking of any kind".
[16] "Enterprise or affair" is defined in the French
version of the Income Tax Act as follows:
“ entreprise ” ou
“ affaire ” comprend une profession, un
métier, un commerce, une industrie ou une activité
de quelque genre que ce soit et, sauf pour l'application de
l'alinéa 18(2)c), de l'article 54.2 et
de l'alinéa 110.6(14)f), un projet comportant
un risque ou une affaire de caractère commercial, mais ne
comprend pas une charge ou un emploi.
[17] Clearly, the appellant's commercial activity fell
within that definition. The respondent however says that despite
its commercial animus he had no reasonable expectation of profit.
It is more accurate to say that he had no profit and therefore
the respondent concludes that he had no reasonable expectation of
it. The two are not the same. In Kaye v. R., [1998] 3
C.T.C. 2248, in commenting on the NREOP principle I said:
I do not find the ritual repetition of the phrase particularly
helpful in cases of this type, and I prefer to put the matter on
the basis "Is there or is there not truly a business?"
This is a broader but, I believe, a more meaningful question and
one that, for me at least, leads to a more fruitful line of
enquiry. No doubt it subsumes the question of the objective
reasonableness of the taxpayer's expectation of profit, but
there is more to it than that. How can it be said that a driller
of wildcat oil wells has a reasonable expectation of profit and
is therefore conducting a business given the extremely low
success rate? Yet no one questions that such companies are
carrying on a business. It is the inherent commerciality of the
enterprise, revealed in its organization, that makes it a
business. Subjective intention to make money, while a factor, is
not determinative, although its absence may militate against the
assertion that an activity is a business.
One cannot view the reasonableness of the expectation of
profit in isolation. One must ask "Would a reasonable
person, looking at a particular activity and applying ordinary
standards of commercial common sense, say 'yes, this is a
business'?" In answering this question the hypothetical
reasonable person would look at such things as capitalization,
knowledge of the participant and time spent. He or she would also
consider whether the person claiming to be in business has gone
about it in an orderly, businesslike way and in the way that a
business person would normally be expected to do.
This leads to a further consideration — that of
reasonableness. The reasonableness of expenditures is dealt with
specifically in section 67 of the Income Tax Act, but it
does not exist in a watertight compartment. Section 67 operates
within the context of a business and assumes the existence of a
business. It is also a component in the question whether a
particular activity is a business. For example, it cannot be
said, in the absence of compelling reasons, that a person would
spend $1,000,000 if all that could reasonably be expected to be
earned was $1,000.
Ultimately, it boils down to a common sense appreciation of
all of the factors, in which each is assigned its appropriate
weight in the overall context. One must of course not discount
entrepreneurial vision and imagination, but they are hard to
evaluate at the outset. Simply put, if you want to be treated as
carrying on a business, you should act like a businessman.
[18] Here we have all of the elements of a business —
commercial animus, a pure profit motive, a type of business that
is carried on by many people in that area and a significant
commitment of capital and time to the enterprise.
[19] It cannot be said that his expectation of profit was
unreasonable in the sense that it was "irrational, absurd
and ridiculous", the words used by the Federal Court of
Appeal in Kuhlmann et al. v. The Queen, 98 DTC 6653 to
define "unreasonable" in the context of NREOP.
[20] The problem is that Mr. Keery had no profits from 1987
on. The losses in 1987, 1988 and 1989 were relatively
insignificant (about $2,500 each year). Starting in 1990,
however, they increased substantially:
TAXATION GROSS COST OF NET
YEAR REVENUE GOODS SOLD EXPENSES
LOSS
1991 NIL $1,325.00 $16,494.00 $17,819.00
1992 $1,573.20 $345.46 $14,418.01 $13,190.27
1993 $5,400.00 NIL $17,269.51 $11,869.51
1994 $2,724.00 $859.39 $14,554.86 $12,690.25
1995 $4,233.36 $1,081.07 $15,127.20 $11,974.91
1996 $1,007.00 * $759.79 $19,927.69 $18,920.69
* Not deducted by the Appellant.
[21] These large losses are attributable to events beyond Mr.
Keery's control, including the amount of interest which he
had to pay on bank borrowings. At least some of the bank
borrowings — probably a large part — were for
business purposes.
[22] Counsel for the respondent argues that the appellant
should have realized, when Cullen absconded with most of the
appellant's equity in the business, that it was time to call
it quits. With the benefit of hindsight she is probably
right.
[23] Probably he should have cut bait in 1991. However, the
Crown's argument is reminiscent of that advanced in Nichol
v. The Queen, 93 DTC 1216 at 1219:
Essentially, what the Minister is saying is that, at the end
of 1985, when the revenues had fallen significantly short of the
projections, the Appellant should have realized that 1986 would
not be a successful year and he should therefore have cut his
losses and stopped the business in that year. It is a matter of
business judgment whether to start a business and it is a matter
of business judgment whether and when to terminate it. This
taxpayer made the business judgment to continue the operation for
another year notwithstanding the results of the 1985 season. He
hoped to turn the business around by forming a new league in
1985, to which the Royals would belong, and in 1986 to improve
the team's performance by creating a farm team and by
persuading the Canadian Press to give much greater publicity to
the Royals' games.
As it turns out none of these remedial actions worked and he
discontinued the operation after 1987. He made what might, in
retrospect, be seen as an error in judgment but it was a matter
of business judgment and it was not one so patently unreasonable
as to entitle this Court or the Minister of National Revenue to
substitute its or his judgment for it, or penalize him for having
made a judgment call that, with the benefit of 20-20 hindsight,
that Monday morning quarterbacks always have, I or the Minister
of National Revenue might not make today. We were, after all, not
there in 1986.
[24] The appellant's problem is not that he did not have a
business but that his accounting records are something of a mess.
The income and expense of all of the business activities in which
he engaged in 1995 and 1996 are flung together into an
undifferentiated farrago and I am left to try to extract some
meaningful commercial data. That is, with some trepidation, what
I propose to do.
[25] No doubt one might simply dismiss his appeal but I should
try to do better than that for him. He has had enough troubles. I
might say that this is more than the Department of National
Revenue has even attempted to do. It has used NREOP as a
substitute for analysis.
1993
[26] He claimed a loss of $11,869.51, based on sales of $5,400
and expenses of $17,269.51. Two items need adjustment — the
interest of $7,661 and the automobile expense of $7,042 ($3,642 +
CCA $3,400). Both were claimed at 100% with no personal use
element. I have very little to go on but the best (and only)
evidence I have is the 1992 assessment in which the Minister
apparently with the agreement of the appellant or his
representative attributed 72.58% of the interest payments to
business. In 1993 if this percentage is used it works out to
$5,560, or a reduction of $2,101.
[27] Similarly, the automobile expense including CCA should be
reduced to the percentage calculated by his accountant in 1995,
68%, or $4,788, a reduction of $2,254. The business loss for 1993
should be therefore $7,514.
1994
[28] Not objected to.
1995
[29] I see no reason not to accept the summary of business
income prepared by the appellant's accountant, Mr. Paul
Taylor, C.A. and entered as Exhibit R-1, subject only to a
reduction of the mortgage and Visa interest of $7,005 to 72.58%,
or $5,084, a reduction of $1,921.
[30] I note that the loss computed by Mr. Taylor was $4,959.
The main reason that the amount is so much less than $11,974
claimed in the return of income is that Mr. Taylor included
$11,250 (3/4 of $15,000) for the conditional sale of the fishing
license to Mr. Kruit. Since the deal did not close this amount
should be written off in 1996. The business loss for 1995 should
be $3,038.
1996
[31] The $11,250 mentioned above should be written off in
1996. Unfortunately we have no analysis similar to that prepared
for 1995 by Mr. Taylor. I have no idea what some of these
expenses are. In the absence of any evidence I do not see how the
business taxes ($366), meals and entertainment ($1,611), supplies
($2,034) and salaries and wages can be allowed at all.
[32] The loss for 1996 should be adjusted as follows:
Amount claimed $18,920
Plus $11,250
$30,170
Minus $366 (Business taxes etc.)
$1,670 (27.42% of the interest of $6,093)
$1,886 (32% of $3,819 (automobile expenses
+ $2,077 CCA)
$2,034 (supplies)
$3,750(salaries, wages and benefits)
Total $9,706
Revised business loss: $20,464
[33] There is a certain rough and ready element to these
calculations, but it is the best I could do in light of the
unsatisfactory evidence.
[34] The appeals are allowed and the assessments are referred
back to the Minister of National Revenue for reconsideration and
reassessment in accordance with these reasons. The appellant is
entitled to his costs, if any, in accordance with the tariff.
Signed at Ottawa, Canada, this 22nd day of September 1999.
"D.G.H. Bowman"
J.T.C.C.
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