Tyrrell v. R., [1996] 1 CTC 2629

McArthur J.T.C.C.: - These appeals were heard in Edmonton under the Informal Procedures of this Court with respect to the Appellant’s 1991 and 1992 taxation years.

The issue is whether the Appellant may deduct the loss of $23,653.55 and $33,081.61 as business losses in 1991 and 1992 (the relevant years).

The husband of the Appellant, Ron B. Tyrrell and the Appellant were the sole witnesses. Their evidence was, for the most part, not supported by documentation. There were no title documents, invoices, receipts, cancelled cheques, planning memorandum, sole proprietorship registration, feasibility studies or other documentation to advance their position and assist the Court.

The testimony, while credible, was sketchy and often times difficult to apply to the benefit of the Appellant keeping the issue in view.

Mr. Tyrrell did enter as evidence a copy of an agreement and a $1,000 deposit cheque dated July 1992 wherein Tyrrell Woodcrafts (the business) offered to purchase a building lot. The transaction was aborted and the $1,000 deposit was forfeited. Mr. Tyrrell further submitted architectural plans and in July 1993 application by Tyrrell for a building permit.

In 1990, the Appellant and her husband conceived an idea to provide suitable residential housing that would suit a resident throughout his or her lifetime. The Appellant is a geriatric nurse and envisaged constructing residences that would suit all ages. Sometime in 1990, a sole proprietorship registration was effected wherein the Appellant declared that she was carrying on business under the firm and style name of Tyrrell Woodcrafts (Tyrrell). Ron Tyrrell purchased a lot for $4,000 in Duffield, Alberta in 1990 land and conveyed it to the Appellant.

The Appellant and her husband decided to suitably improve the lot to permit construction of a workshop. The lot, with improvements, was conveyed to the Appellant in November of 1991 in consideration of $19,500. The consideration was equal to the appraised value. No deed, appraisal, cancelled cheque or like document was entered as evidence.

Any money advanced to the business was from the Appellant’s separate funds or from institutional loans guaranteed by the Appellant. There were no payroll records of any nature offered, but the evidence was that the Appellant paid Mr. Tyrrell the sum of $12,000 - $15,000 in lump sum in 1991 and 1992 as salary for services rendered to Tyrrell.

The Court is unclear as to the expenditures for the remainder of the sums at issue. In pursuit of the purposes of the business, Ron Tyrrell sought the services of a real estate broker in 1991 to locate a suitable building site for a residence. None was forthcoming and in 1992 the work shop was constructed on the lot and equipped and tools owned by Mr. Tyrrell were purchased by Tyrrell.

The business activity of Tyrrell during the relevant period included the purchase of the lot, the construction of the work shop facility and the aborted attempt to purchase a building lot. Photographs of the completed facility were filed as evidence. They portrayed an attractive aluminum sided building, of approximately 2,000 square feet and a smaller support shed.

The Minister made, in part, the following assumptions of fact in paragraph 7 of the Reply to Notice of Appeal:

(b) at all material times hereto, the Appellant and Ron were partners in the Partnership;

(c) the Partnership had not commenced a business in 1991 and 1992;

(d) the property owned by the Partnership was not acquired for the purpose of gaining or producing income from a business or property at all material times hereto;

(e) a shop owned by the Partnership had not become available for use by the Partnership at all material times hereto;

(f) from 1991 to 1992 the Appellant reported the following (losses) from Tyrrell Woodcrafts’ activity (the “Activity”):

TAXATION	GROSS		NET
YEAR	INCOME	EXPENSES	INCOME (LOSS)
YEAR
1991	nil	$23,653.55	$(23,653.55)
	$2,200.00	$35,281.69	$(33,081.69)
1992

(g) the income of $2,200.00 in 1992 was from a personal service provided to Ron’s brother and was income from the Activity;

(h) the expenses claimed in relation to the Activity were personal or living expenses of the Appellant and Ron.

The position of the Appellant was that she established a business Tyrrell Woodcrafts to, amongst other things, realize her ideas to construct specialized housing. She hired her husband who had the ability to complete the projects and in developing Tyrrell she incurred legitimate deductible expenses. Having a realistic business plan she submitted that Tyrrell had a reasonable expectation of profit.

Position of the Respondent as set out in the Reply to Notice of Appeal:

10. He submits that as the Partnership had not commenced a business in 1991 and 1992 taxation years, the expenses claimed by the Appellant in respect of the Activity were not incurred for the purpose of gaining or producing income from a business or property but were personal or living expenses of the Appellant and Ron, pursuant to paragraphs 18(1 )(a) and 18(1 )(h) of the Act, and therefore the Minister properly disallowed the losses of $23,653.55 and $33,081.69 as business losses in 1991 and 1992 taxation years, respectively.

11. In the alternative, he submits that the Partnership did not have a reasonable expectation of profit from the Activity in the 1991 and 1992 taxation years, that the expenses claimed by the Appellant were personal or living expenses of the Appellant and Ron, pursuant to paragraphs 18(1 )(a) and 18(l)(h) of the Act, and that the Minister properly disallowed the losses of $23,653.55 and $33,081.69 as business losses in 1991 and 1992 taxation years, respectively.

12. He submits that if the Partnership had commenced a business in 1991 or 1992, which is not admitted but is expressly denied, the shop owned by the Partnership had not become available for use by the Partnership at all material times hereto, therefore the Partnership was not allowed to deduct the capital cost allowance on the undepreciated capital cost of the shop in 1991 and 1992, pursuant to subsections 13(26) and 13(27) of the Acct.

13. He submits that if the Partnership had commenced a business in 1991 or 1992 taxation years, which is not admitted but is expressly denied, the loss allocated to the Appellant in 1991 and 1992 taxation years was unreasonable in the circumstances, pursuant to subsection 103(1.1) of the Act.

I: 14. He submits that if Ron and the Appellant were not partners in respect of the activity in 1991 and 1992 taxation years, which is not admitted but is expressly denied, the wages allegedly paid or payable by the Appellant to Ron was not reasonable in the circumstances pursuant to section 67 of the Act.

15. He requests that the appeal be dismissed.

Legislation

The relevant portions of paragraph 18(l)(a) of the Act read as follows:

18(1 )(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;

Analysis

Given all of the evidence, I conclude that the Appellant and Ron Tyrrell were partners and, from the evidence available, that partnership commenced sometime in 1991. The Appellant contributed funds and creditworthiness, Ron Tyrrell contributed labour and expertise.

Counsel for the Respondent referred the Court to Moldowan v. R. (sub nom. Moldowan v. The Queen), [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213 wherein the S.C.C. stated at page 5215:

In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer’s training, the taxpayer’s intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive. The factors will differ with the nature an extent of the undertaking.

In Fearn v. R. (sub nom. Fearn v. Canada), [1995] 1 C.T.C. 127, 95 D.T.C. 5052 the Court stated at page 5054:

As a general rule, for an amount to be deductible as a business expense, the taxpayer must have been carrying on business in the fiscal period in which the expense was incurred. [1] It is therefore necessary to establish whether the plaintiffs activities were tantamount to carrying on a business.

There is ample jurisprudence to establish that expenses laid out prior to the commencement of the business are not deductible under paragraph 18(l)(a) of the Act. For example, in Rolland v. Minister of National Revenue, [1987] 2 C.T.C. 2001, 87 D.T.C. 341, the taxpayer decided to start his own hot hair [sic] ballooning business. As such, he ordered accessory equipment and took lessons to secure an operator’s licence. However, he did not accept passengers during the years for which he claimed the business expenditures. In light of this fact situation, the Tax Court found that the losses were incurred by the taxpayer when no business had yet commenced. In support of this finding, the Court relied on a statement made by the Court in Daley v. Minister of National Revenue, [1950] C.T.C. 254, 50 D.T.C. 877, at page 880. It seems clear that a disbursement or expense such as this which is laid out or expended not in the course of the operations, transactions or services from which the taxpayers earned his income but at a time anterior to their commencement and by way of qualification or preparation for them is not the kind of disbursement or expense that could be properly deducted in the ascertainment or estimation of his “annual net profit or gain”.

[Emphasis added. ]

In applying the criteria and reasoning of the aforementioned jurisprudence, I conclude that the plans and aspirations of the Appellant and her husband never materialized and remained in the preparatory stage. There was no evidence that the concept was sound and that the partners had the requirements to make Tyrrell a profitable business. The Court was not presented with market studies, business and project plans or the like.

There was no income from Tyrrell in 1991 and $2,200 gross income in 1992. As stated in Moldowan, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts and not simply a good idea or dream that can not be realistically seen to fruition.

There was insufficient evidence before the Court to adequately apply the Moldowan criteria. The direction towards creating a business with a purpose had been commenced but in the relevant years the necessary elements to establish a reasonable expectation of profit did not exist or were not presented to the Court. General statements of intent are not sufficient for the Appellant to satisfy the burden of proof required.

For these reasons the appeals are dismissed.

Appeals dismissed.