Nadine Cipollone (Also Known as Dr. Phela Goodstein) v. Her Majesty the Queen, [1995] 1 CTC 2598

Bowman J.T.C.C. (orally):—I shall now render judgment in the case of Dr. Phela Goodstein, court file number 94-54.

These appeals are from reassessments for the appellant’s 1987, 1988, and 1989 taxation years.

The appellant’s real name is Nadine Cipollone, but she operates under the professional name of Dr. Phela Goodstein, having registered as a trade mark the words "Doctor of Humour". She owns and operates an organization known as the "Institute of Humour" at 6000 Yonge Street in North York, Ontario.

Since the notices of assessment, as well as the Reply to the Notice of Appeal, are in the name of Nadine Cipollone, I am ordering that the name of the appellant in the style of cause in these proceedings be amended to read "Nadine Cipollone, also known as Dr. Phela Goodstein".

The appellant in 1986 registered under the Ontario Partnerships Registration Act, R.S.O. 1980, c. 371, a declaration of a sole proprietorship under the name of Dr. Phela Goodstein, the business activity of which was described as Humourologist.

Her business, if it can be so called, is variously described in her evidence and in the numerous newspaper articles and publicity releases that she submitted in evidence as clown, court jester, humour therapist, and humourologist. She has held humour therapy workshops and lectured on humour. She has appeared, for a fee, for such organizations as the Canadian Institute of Chartered Accountants, the Wellington-Dufferin- Guelph Health Unit, the Holistic Centre of Hamilton, the Corporation of the City of Burlington, the OSSTF (Ontario Secondary School Teachers Federation) in Thunder Bay, the Ontario Association of Registered Nursing Assistants, the Humber College Business and Industry Services, the North York General Hospital, the Disabled Women’s Network, the York West Senior Citizens Centre, the Public Health Department of the City of York, the Bernard Betel Centre for Creative Living, the Ontario Gerontology Association.

She has been given unpaid publicity in such publications as Toronto Life, The Sunday Sun, The Toronto Globe & Mail, The Financial Post magazine, and the Journal of the Canadian Psychology Association, and as well, as recently as this morning, The Toronto Star.

She has contracts to appear before the employees of British Columbia Telephone Company in British Columbia and the Centennial College of Applied Arts and Technology.

Recognition of the appellant as a comedienne and humourist has been somewhat slow in coming and has occurred several years after the years under appeal. She is obviously a going concern. She is a person of enormous energy, enthusiasm, and dynamism, with apparently an unlimited optimism and virtually boundless belief in her own ability to succeed in the very competitive and difficult field of public comedy. She is undaunted by the fact that up to the present, since 1987, she has so far failed to realize a profit, at least given the very large deductions she has been claiming, her expenses for every year having exceeded her income.

The figures for the years since 1987 are rather revealing. In 1987, her revenues were $85.00 and expenses $14,588.00, for a loss of $14,503.00. In 1988, her revenues were $475.00 and her expenses were $7,693.00, for a loss of $7,218.00. For 1989, her revenues were $3,653.00 and expenses of $14,072.00, for a loss of $10,419.00. For 1990, her revenues were $1,327.00 and expenses were $11,370.00, for a loss of $10,043.00. For 1991, her revenues were $1,391.00 and her expenses were $12,998.00, for a loss of $11,607.00. The Department of National Revenue evidently did not have, or has at least not assessed, her 1992 return, but she had revenues of about $4,000.00 and expenses exceeding that amount. In 1993, she had revenues of $5,300.00 and $17,000.00 in expenses, giving rise to a loss of about $12,000.00.

It is hardly surprising that the Department of National Revenue, in reviewing her returns, concluded that with so great a discrepancy between her revenues and her expenses, her activities as a humour therapist had, to use the words of the Chief Justice of Canada in Moldowan v. The Queen, [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213, "no reasonable expectation of profit" and, therefore, no business, or that the expenses were not laid out for the purpose of gaining or producing income from a business. Mr. Cornfield, an auditor with the Department of National Revenue, testified, quite reasonably in my view, that on looking at the discrepancy between her receipts and her claimed expenditures, he concluded that she had no reasonable expectation of profit.

I quite agree that no business with the sort of revenues that she had and the amount of expenses that she was claiming could reasonably expect to earn a profit unless her revenues increased dramatically or her expenses decreased.

I do not, however, think that this approach is entirely consistent with the evidence I heard yesterday. The reason her losses were as great as they were was not because the business had no reasonable expectation of profit or because she was not expending money for the purpose of gaining or producing income from a business. I find as a fact that she was spending money in order to earn a profit and that her expectation of earning a profit was reasonable, if she had chosen to claim reasonable expenses. The problem lies not in the absence of a reasonable expectation of profit — businesses of this sort can be quite lucrative - but rather in the attempt to deduct unreasonable expenses.

Her claim for expenses was, in my opinion, unreasonable. The Crown pleaded that the Minister of National Revenue assumed that her expenses were not laid out for the purpose of gaining or producing income from a business within the meaning of paragraph 18(l)(a) of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1 (the "Act"), and that since she had no reasonable expectation of profit that, therefore, they were personal and living expenses within the meaning of paragraph 18(l)(h) and section 248 of the Income Tax Act.

I think her activities constitute a business and that her evidence has demonstrated, on the balance of probabilities, that the assumption that she had none was wrong. I do not think it is appropriate that novel and possibly unusual types of businesses be discouraged if they are embarked on in good faith.

The portion of the Minister’s case with which I do, however, agree is the assertion, not pleaded as an assumption but as a separate ground for upholding the assessment, that the expenses are unreasonable within the meaning of section 67. One needs only to compare the expenses with the revenues to see how disproportionate they are. Some of the expenses claimed are illustrative of what I am saying. For example, in 1987, she had automobile expenses of $2,968.95; clothes and accessories expenses of $3,706.00; entertainment, promotion, and travel, $2,334.56; office in the home, $2,681.00. In 1988, she had automobile expenses of $3,849.00; clothes and accessories of somewhat less at $994.00. In 1989, she had clothes expenses of $1,253.00; entertainment, $1,179.00. Comparing these expenses to the sort of revenues that she was generating, I think that they are unreasonable.

Since the Minister has pleaded as a separate head and not as an assumption that they are unreasonable, the onus is of course on him to establish the truth of the assertion. It is obvious that they are unreasonable, but within a range of indeterminate magnitude.

In disposing of this appeal I have three alternatives: (a) to allow the appeal and to permit the deductions claimed on the ground that the appellant has, on the balance of probabilities, shown that the pleaded assumptions were wrong; (b) to dismiss the appeal on the grounds that it was for the appellant to establish what would have been reasonable; or (c) to refer the matter back to the Minister of National Revenue on the basis that although the expenses were laid out to earn income and with a reasonable expectation of profit, they were unreasonable and that the Minister should consider what portion is reasonable on the basis that a reasonable portion of the expenses was properly deductible.

The first two dispositions are patently wrong, the first because it is unfair to the Minister of National Revenue to allow an excessive deduction and the second because it is unfair to the taxpayer because it allows her no reasonable costs of her business. Procedural fairness and common sense dictate the third alternative.

Subsection 171(1) of the Income Tax Act permits this Court to dispose of an appeal by (a) dismissing it; (b) allowing it and vacating the assessment, varying the assessment, or referring the assessment back to the Minister for reconsideration and reassessment. It is precisely this type of situation where the court does not have the evidence to determine what is reasonable that permits the court to refer an assessment back for reconsideration. Some meaning must be given to that term and I think this is an appropriate case for using it. The appellant should be informed, however, that this may be something of a Pyrrhic victory because a good portion of her expenses may,, On examination, turn out to be unreasonable. She may be able to persuade the departmental officials that it is reasonable, given her line of work, to deduct the cost of massages, for example; I remain somewhat skeptical. I think the clothes and automobile expenses are, in the context of this business, out of line.

As to the penalties, they cannot stand. The Crown has not established that by claiming expenses in excess of an amount that might be considered reasonable is an act of wilful default or gross negligence in the circumstances of this case so as to justify a penalty. The appellant acted on the advice of her chartered accountant, a former Department of National Revenue employee, to whom she gave her receipts. If anyone should be criticized, it is he. I rely upon the decision of the Exchequer Court in Udell V.M.N.R., [1969] C.T.C. 704, 70 D.T.C. 6019.

The appeals are, therefore, allowed and the assessments referred back to the Minister to delete the penalties and to reconsider the assessments to determine what portion of the business expenses claimed by the appellant are reasonable and to reassess accordingly. Each party should bear its own costs. Thank you.

Appeals allowed.