Leblanc v. R., [1996] 2 CTC 2522 (Informal Procedure)

Taylor J.T.C.C.: — These are appeals heard in Ottawa, Ontario on March 19, 1996 against income tax assessments for the years 1991, 1992 and 1993 in which the Respondent disallowed claims for losses in the amounts of $11,086.33, $7,283.29 and $3,574.16 respectively. The Notice of Appeal dated June 7, 1995 read in part:

The principal issue is whether I was carrying on a business for the purpose of gaining or producing income within the meaning of paragraph 18(l)(a) of the Act. They state, in their letters dated 26 July and 26 September 1995, that I am carrying on a business without a reasonable expectation of profit in the near future.

Secondary issues involved are lack of receipts for meals, no receipt for sales, car insurance showing “personal use” and no advertising expenses.

My business generated a profit in 1994, as I informed them that it was likely to do. I am also predicting a profit for 1995.

The Reply to Notice of Appeal, put the Respondent’s position in assessing as follows:

— the Appellant retired from the Federal Civil Service in 1987 and started a consulting activity (the “Activity”), specializing as a consultant for the packaging and transportation of hazardous goods;

— the Appellant’s chief source of income during the years under appeal consisted of superannuation income in the amounts of $34,689.84 in 1991, $34,767.98 in 1992 and $32,733.84 in 1993;

- from 1987 to 1993 the Appellant reported the following losses from the Activity:

Year	Gross Revenue	Total Expenses		Net oss
1987	$1,670	$ 4,282		$(2,612)
1988	4,099	14,573		(10,474)
1989	7,804	17,414		( 9,610)
1990	9,133	24,252		(15,119)
199]	6,290	17,376		(11,086)
1992	6,200	13,483		( 7,283)
1993	5,660	9,234	( 3,574)

— the Appellant computed his net losses from the Activity for the years under appeal as follows (in round figures):

1991 1992 1993

Gross revenue $ 6290 $ 6.200$ 5.660

Expenses:

Travel expense $ 7,936 $ 5,225$ 3,255

Car expenses 5,319 3,970 2,170

Office expenses 1,707 2,665 1,863

All other expenses 2.414 1,623 1.946

Total expenses $ 17.376 2.13.661 2.2.23

Net business losses $(11,086)

21.2.2311

$( 3.574)

— the Appellant operated his Activity from his residence, and the office expenses in paragraph 8(d) above constitute “work space in home” expenses;

— Of the travel expense and car expenses shown in paragraph 8(d) of this document, the following amounts were expended by the Appellant in connection with personal trips to Florida:

	1991	1992
Travel expense	$2,494	$1,366
Car expenses	1.144	866

22,033 $2232

— the Appellant had no systematic plan or organized program to render the Activity profitable;

The only point raised by the Appellant was that he had reported a profit in 1994 of some $1,600.00 - the year subsequent to those under appeal, and expected to report a profit for the year 1995 also, and a draft 1995 financial statement was presented. His explanation for the losses claimed in the years under review (included with the financial statements filed in Court) were as follow:

1991 — Weakness in US and Canadian economies makes it difficult to put on successful courses. Sponsors are leery. Volunteer work continues, as means to establish reputation.

1992 - Lack of diligent enforcement by Canadian and US governments, coupled with weak economies means low attendance at courses. Volunteer standards work continues for promotion reasons. Courses to meet U.S. DOT HM 126 requirements are currently being prepared for presentation in fall, 1993.

1993 — Lack of diligent enforcement of regulations by Canadian and US governments continues to be a problem. Low registrations caused cancellation of two courses, in Chicago and Cincinnati. Volunteer standards work continues for promotion reasons, but curtailed somewhat to reduce travel expenses. Losses are significantly reduced from last year.

Continuing for 1994 and 1995, the explanations were:

1994 — Lack of diligent enforcement of regulations by US government continues to be a problem, although this situation is improving. Better US economy reflected in higher income. Volunteer standards work continues for promotion reasons, but travel in this regard reduced in order to curtail costs. Intend to reduce office space in 1995.

1995 — Surgeries in late August and mid-October (laid up 25 Aug - 15 Nov) resulted in loss of business, particularly at Michigan State University, valued at $2,200 US.

The position of the Respondent was that the small profit reported in 1994 (above) should not warrant the rejection of the decision of the Minister of National Revenue that there was no “reasonable expectation of profit” during the years under appeal.

Analysis

First, I would note that a major part of that reported as gross income from which the disputed expenses were claimed was in fact “earned interest and exchange” and it is at least arguable that the change from loss in 1993 to profit in 1994 had a great deal to do with a greater amount of such “interest” income rather than sales - whatever that interest might represent, since it was not identified at the trial. A substantial reduction in car expenses, travel and office expenses, between 1993 and 1994 is also observed and the Respondent had noted serious questions that should be raised about these categories of expenses aside from the main issue. Another factor which might have had some bearing on this positive change is that the assessments at issue (for 1991, 1992 and 1993) were struck on October 6, 1994, after a period of review and questioning of the Appellant by Revenue Canada. Obviously, I am not greatly impressed by this apparent improvement nor by the explanations provided (above) for the losses incurred. I would think the Respondent in this matter is on rather good ground to be somewhat sceptical about this one year result (1994). However, I do not believe it should be completely ignored, although it is quite evident that in assessing there was a “start up period” of at least four years (1987, 1988, 1989 and 1990) with total losses allowed of over $37,000.00. I can think of little reason that this situation should have been allowed to be perpetuated that long by Revenue Canada - but that is back beyond the three year limitation restriction for reassessment, and is not before the Court. Apparently, Revenue Canada permitted (by the original assessments) this “start-up” period to continue for another three years - the years under review before reassessing.

It would not be unrealistic to dismiss all three appeals on the grounds above, but taking into account the directive and flexibility for this Court to be seen in the recent judgment of the Federal Court of Appeal in Tonn (not yet published - but identified as A652-94), it would be more appropriate to consider that the financial record does demonstrate that a reasonable expectation of profit existed in the year 1993 - even if only by virtue of the Appellants curtailment of dubious expenses claimed in the years before. Allowing the Appellant the benefit of the doubt for the year 1993 would permit his utilization of the provisions of section 111 of the Act for profits in the year 1994, and also those for 1995 which he says he has calculated. It would also permit him to continue with his business, on an equitable basis, from year to year, assuming that his profits continued. On this point, the use of section 111 of the Act, I would make reference to the recent case of Joseph v. R. (March 19, 1996), Doc. 95-755 (IT) I (T.C.C.).

The appeals are allowed in order to permit the deduction of the loss of $3,574.00 for the year 1993. In all other respects, the appeals are dismissed. The entire matter is referred back to the Minister of National Revenue for reconsideration and reassessment. No costs are awarded.

Appeals allowed in part.