Date: 19971216
Docket: 97-186(IT)I
BETWEEN:
BRAD CORCORAN,
Appellant ,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(Delivered orally from the Bench in Toronto,
Ontario,
on October 8, 1997)
Hamlyn, J.T.C.C.
[1] This is in the matter of Brad
Corcoran and Her Majesty The Queen, and are appeals with respect
to the 1992, 1993 and 1994 taxation years.
[2] In computing his income for the
1992, 1993 and 1994 taxation years, the Appellant deducted the
amounts of $10,560.00, $12,737.00 and $5,961.29, respectively, as
business losses.
[3] In reassessing the Appellant for
the 1992, 1993 and 1994 taxation years, the Minister of National
Revenue (the "Minister") disallowed the deduction of
the business losses.
[4] In reassessing the Appellant, the
Minister made the following assumptions of fact: that at all
relevant times throughout the 1992, 1993 and 1994 taxation years,
the Appellant was a full-time employee of Annan Bird Litographers
Ltd., but the disallowed business losses were in respect of a
purported automobile racing business. And from January 1st, 1990
to December 31st, 1994, the Appellant reported gross income
from a purported automobile racing business and expenses and
losses that are set forth in a schedule attached to the reply.
And that schedule I adopt as part of these reasons at this time,
but I will not read them in.
[5] Further, the Minister assumed the
claimed expenses were not made or incurred for the purpose of
gaining or producing income, but were made or incurred in the
pursuit of a hobby. The expenses claimed were personal or living
expenses. And lastly, the Appellant had no reasonable
expectation of profit from the purported business during the
1992, 1993 and 1994 taxation years.
ISSUE
[6] The issue before the Court is
whether the Appellant is entitled to deduct the claimed
expenditures related to the purported business in 1992, 1993 and
1994 taxation years.
FACTS
[7] The Appellant, in the appeals
document which he sent to this Court, and substantially, he
confirmed today in his evidence, reads, in part, as follows:
1. The
Appellant is a Canadian resident who resides at 49 35th Street,
Etobikoke, Ontario, M8W 3K3
2. The
Appellant is a professional race car driver who competes in
various professional car races in Ontario, particularly at
Mosport International Speedway. The Appellant is the sole owner
and driver of the race car.
3. As a
professional race car driver, a source of income is derived from
advertising, i.e. the Appellant will place certain business logos
or trademarks on his race car in exchange for an advertising fee
from these companies (referred to as "sponsors").
Presently, the Appellant's major sponsor is Slick 50, a
company in the business of selling engine products.
4. The
Appellant also earns prize money from successful completing
professional races.
[8] It is further stated in the appeal
document, and the Appellant confirmed this evidence:
5. At all
times, the Appellant anticipated the net income from his
professional car racing operations would increase as he gained
experience.
6.
Specifically, the Appellant anticipated that his income from
advertising and sponsorships would increase as his driving
performance improved.
[9] The Appellant's basic position
is also found in that same appeal document, which he claims
expenses incurred by him in connection with his professional
racing operations were incurred for the sole purpose of gaining
or producing income from a business or property. The Appellant
claims at all times he had a reasonable expectation of profit
from the professional racing operations and, in fact, did earn a
profit from his professional racing operations during the 1995
taxation year.
JURISPRUDENCE
[10] The Income Tax Act (the
"Act") does not define "business", but
merely stipulates that a "business" includes a
profession, calling, trade, manufacture, undertaking of any kind
whatever. Generally speaking, "business" refers to some
form of industrial, commercial or financial endeavour or
activity. If a business is not being conducted at all, it cannot
be said to be a business. The word "business" implies
the presence of some economic activity. A taxpayer's income
for a taxation year from a business or property is the profit
therefrom for the year.
[11] Profit means net profit, that is,
revenues minus expenses incurred for the purpose of earning
income. Expenses sought to be deducted must be reasonable, not
artificial, not personal and must be for the purpose of producing
income, and must not be prohibited by statute. The purpose of an
expectation of profit determines whether income from a particular
source is income from a business. The expectation of profit is
central to the concept of business and distinguishes it from the
pursuit of a hobby. The determination of a reasonable expectation
of profit is a finding of fact.
[12] Now, and this was referred to by
counsel, reasonable expectation of profit has been explored by
the Federal Court of Appeal in Tonn v. The Queen,
96 DTC 6001. And generally, Linden, J.A., is critical
of the Courts for applying the test too strictly and for
substituting the judge's business judgement for that of the
taxpayer. And, specifically, at page 6009, Linden, J.A.
states:
The tax system has every interest in investigating the bona
fides of a taxpayer's dealings in certain situations, but
it should not discourage, or penalize, honest but erroneous
business decisions.
...
Consequently, when the circumstances do not admit of any
suspicion that the business loss was made for a personal or
non-business motive, the test should be applied sparingly and
with a latitude favouring the taxpayer, whose business judgment
may have been less than competent.
[13] The Court of Appeal has also gone on,
and this was also cited to the Court by counsel, in the case of
Mastri and The Attorney General of Canada. I have that
judgment before me now, and it is known as file number A-650-96.
That is also a decision of the Federal Court of Appeal.
Robertson, J.A. states in an extension of the Tonn
decision, and that is on pages 7 and 8 of the printed copy:
It is simply unreasonable to posit that the Court intended to
establish a rule of law to the effect that, even though there was
no reasonable expectation of profit, losses are deductible from
other income sources unless, for example, the income earning
activity involved a personal element. The reference to
Moldowan test being applied "sparingly" is not
intended as a rule of law, but as a common-sense guideline for
judges of the Tax Court. In other words, the term
"sparingly" was meant to convey the understanding that
in cases, for example, where there is no personal element the
judge should apply the reasonable expectation of profit test less
assiduously than he or she might do if such a factor were
present. It is in this sense that the Court in Tonn
cautioned against "second-guessing" the business
decisions of the taxpayers.
[14] So it is with that background I
consider the decisions that were cited to the Court today as
further jurisprudence.
[15] The first case that was cited, I
believe, was Huband v. M.N.R., 74 DTC 1039. In
that case, the Appellant, who was employed as a commerce officer
with the Department of Trade and Commerce, began his car racing
activities as a hobby in 1965. But from that year through to
1968, bought and re-sold bigger and better cars, and entered more
rigorous and demanding racing competitions each year. In 1969, he
realized $500 in racing, but claimed a net loss of $3,600. The
following year, he made $800, but sustained losses of $8,000. The
Minister refused to allow the deduction of these amounts from
income, claiming that the Appellant was not in the business of
car racing with a reasonable expectation of profit, and the
income taxpayer, of course, objected. And it was held in that
case that the Appellant was entitled to deduct the losses that he
had suffered in 1969 and 1970.
[16] Over the years, he had spent over 80%
of his salary in acquiring cars and equipment to race
professionally. Therefore, it could not be said that he was
merely enjoying a sport or hobby, no matter how much pleasure he
may have derived from the activity.
[17] Furthermore, the Tax Review Board
noted, in that case, that auto racing, unlike most enterprises,
involved a high degree of risk, in which large losses can be
expected as a matter of course.
[18] The next case that was cited was
Cook v. M.N.R., 85 DTC 167. From the headnote of
that case, the taxpayer was employed full-time and was involved
in car rally racing. The taxpayer deducted losses associated with
his car racing business from other income. The Minister
disallowed the deduction on the basis that the racing activities
were personal living expenses and did not constitute a
business.
[19] The taxpayer appealed to this Court,
and the appeal was allowed. The Court found that the
taxpayer's racing activities were a business from which the
taxpayer had a reasonable expectation of profit. The taxpayer was
beginning to earn a small profit from his car racing, after
several years of losses. The nature of the activity was such that
the initial years were spent securing experience and sponsors, in
order to earn future profit.
[20] And the case that was cited to the
Court by the Crown is the case of Dan Brown and Her Majesty
The Queen (file number 95-1723(IT)I). That is a case of a
similar nature. It was decided by Judge Sarchuk of this Court. In
that particular case, the Appellant sought to deduct certain
amounts for several taxation years as business losses from
snowmobile and automobile racing.
[21] I have read that case carefully to
determine its applicability to this case, and it does have some
applicability. But I think it is important that I read from page
4, the following findings of Judge Sarchuk:
The issue in this appeal is whether the Appellant's racing
venture was a business carried on for profit or with a reasonable
expectation of profit in the taxation years in issue. At the
outset, let me say I am not convinced the Appellant's
business in those years was comprised of two complementary racing
activities and that accordingly, the years 1990 to 1992 inclusive
can be said to be start-up years for the stock car venture he now
carries on. The evidence is quite clear that in 1990 the
Appellant limited his business activities to snowmobile racing
and indeed, that is pleaded in his Notice of Appeal. Furthermore,
the analyses that the Appellant made in 1988 and 1989 focused
principally on the potential profitability of snowmobile racing
and were premised by his belief that a number of high-caliber
snowmobile race events offering greater financial payouts were
available.
[22] Judge Sarchuk then goes on to find:
His involvement in stock car racing in the taxation years in
issue was in my view a continuation of a hobby that he had
participated in himself as a driver and continued to do as a car
owner.
[23] Then he goes on to say, after finding
the strong personal element that was involved in this case in
relation to what I deem to be the snowmobile part of the case, at
page 6:
I am satisfied on the evidence that although the
Appellant may have convinced himself that the pursuit of
profit from snowmobile racing was reasonable and likely to be
successful in a commercial sense, that conclusion was unrealistic
and the expectation of profit was unreasonable.
ANALYSIS
[24] So we turn now to this case, and what
do we have? We have an Appellant who commenced his racing
activities in 1990. He received some short-term racing training
in Florida. He did have some success in racing in 1992 and 1993.
He did not race in 1994, and he has had some success, in terms of
profit, for 1995 and 1996. As well, he anticipates from his
activities for this particular year, a profit at the end of the
1997 taxation year. Prior to the 1992 taxation year, he had a
history of losses from '90 up to 1994.
[25] The source of income stream comes from
two parts. The first part is winnings and races, and the second
part is sponsorship. But from the evidence, I conclude the two go
hand-in-hand. And most of the expenses that the Appellant
incurs are for maintenance to the vehicle and promotion of his
activities. Throughout, the Appellant asserted that he operated
his racing activities with an expectation of profit.
[26] When you take a look at the history of
profit and losses in this matter from 1990 until 1997, it lends
credence to a conclusion, that the Appellant 's contention
that he was operating a business. Because if you look
specifically at the year 1994, you come to the conclusion that he
refrained from racing because of a lack of an income stream.
Furthermore, he spends considerable time on his activity, and has
been trained and continues to carry on his racing activity in
pursuit of this income stream.
[27] I conclude from his evidence, although
there were early years of start-up losses, that he did attempt to
control his costs and makes decisions in relation to racing based
on his potential of an income flow.
CONCLUSION
[28] The involvement of the Appellant in
this activity for the 1992 and 1993 taxation years was not simply
a hobby. While it had a personal satisfaction element, it was
conducted like a business. In 1994, he did not race; as such I
conclude he did not carry on business of stock car racing, as the
business income is both a combination of race winnings and
sponsorship. And in 1994, he could not be assured of that income
stream. However, the subjective anticipation of a reasonable
expectation of profit is carried forward objectively [in 1995 and
1996], and is borne out by the way he conducted his business and
his subsequent history of profits.
DECISION
[29] In this matter, the appeals for 1992
and 1993 are allowed and referred back to the Minister for
reconsideration and reassessment on the basis that for those
years the Appellant operated a business and had a reasonable
expectation of profit from his business.
[30] For the year 1994, the appeal is
dismissed, as I cannot conclude he operated his business and,
therefore, did not have a reasonable expectation of profit.
Signed at Ottawa, Canada, this 16th day of December 1997.
J.T.C.C.
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