Gary John Speck v. Minister of National Revenue, [1988] 2 CTC 2133, 88 DTC 1518

Taylor, T.C.J.: —These are appeals heard in Sudbury, Ontario, on May 20, 1988, against income tax assessments for the years 1982, 1983 and 1984, in which the Minister of National Revenue disallowed "business" losses claimed in the amount of $3,338.91, $4,038.09 and $3,590.09 respectively. Certain particularly relevant portions from the notice of appeal were:

. . . I was building a business on a part time basis, investing in equipment, etc. as funds allowed, with a target date of turning a profit within a five year time span, as advised by the ministry. As my 1985 Income Tax forms did show a profit in my business, I am within the guidelines as explained to me. This past year of 1986, I have increased my part time business income considerably and my expenses have decreased.

. . . my business has the potential to increase its profitability, . . .

. . . Confirmation of the Reassessment is . . . based on . . . "either personal or living expenses", or “a capital outlay". . . . Is not a business allowed to purchase capital equipment and claim such as capital depreciation allowances?

. . . my business is expanding and reflects a profit in the past two years.

The reply to notice of appeal pointed out:

— at all material times, the Appellant was employed full-time as a teacher;

— during the material period, the Appellant carried on automobile restoration activities under the name and style of Speck & Sons Restoration and Custom Shop ("Speck & Sons");

— in the 1982, 1983 and 1984 taxation years, the Appellant declared the following income and expenses from Speck & Sons:

Year	Income		Expenses	Business Loss
1982	$	345.31	$3,684.22	$3,388.91
1982	$	613.26	$4,651.35	$4,038.09
1984	$1,060.97		$4,651.06	$3,590.09

— the expenses incurred in connection with Speck & Sons were not incurred in connection with a business carried on for profit or with a reasonable expectation of profit; and

— the expenses incurred in connection with Speck & Sons were personal or living expenses within the meaning of paragraph 18(1 )(h) of the Income Tax Act.

The Respondent relies, among others, on sections 9(2), 18(1)(a), 18(1)(b), 18(1)(h), and 248(1) of the Income Tax Act, R.S.C. 1952, c. 148 (hereinafter called the Act) as amended.

In his evidence, Mr. Speck related what he regarded as unsatisfactory attention to his operation by officials of Revenue Canada before the assessments were struck, particularly that no detailed personal examination of his premises and operation was made, or sufficient time spent by such officials explaining the situation to him. He also indicated that he thought he was following directions and guidelines from Revenue Canada to establish a business. During the years at issue, according to Mr. Speck, he had established his reputation and competence in the field, and expected that the operation would provide work and income for him when he retired. There are other auto repair shops in Richards Landing all doing well in his view. He was fully aware that during the early years he could not show a profit, but was quite satisfied it could be anticipated in five years — which it is contended he did.

During cross-examination, counsel for the Minister filed through the appellant a copy of his 1985 income tax return and statement of income and expenses, which showed:

Counsel pointed out that in previous years (the three years in issue) Mr. Speck had not shown any “closing inventory". His answer was that he had been gradually building up a small inventory and was quite satisfied it was at least the $300 shown by December 31, 1985. Under questioning he did agree also that the $548.35 C.C.A., supra,was incorrectly calculated and could have been $300 more. It was counsel's assertion that Mr. Speck’s 1985 “profit” of $417.58, supra, could therefore have been a loss of some $182.42 ($600.00 - $417.58) and he could not claim his operation was now showing a profit. Counsel relied on Warden v. M.N.R., [1981] C.T.C. 2379 at 2389; 81 D.T.C. 322 at 329:

. . . When a taxpayer claims expenses which are in excess of income, then he must assume the difficult task of showing that these "excess" expenses were rational and reasonable — those which a normally wise and prudent man intending to improve not reduce his financial position, would incur under the circumstances.

No question was raised by the Minister with regard to the matter of the expenses involved, or whether some of these might more appropriately be considered capital rather than current costs.

Analysis

I would first note that I did not find Mr. Speck's criticism of the efforts of Revenue Canada very convincing, but in any event such references cannot be used by him to offset the assessment at issue — his claim for deduction must be supported on its own merits. I am satisfied that the circumstances he has portrayed serve to warrant that claim. Mr. Speck's contention that he made a profit during 1985 and 1986 has not been seriously challenged by the Minister — the two points that the Minister made with regard to 1985 are trivial and irrelevant. The Minister did not present the 1986 income tax information in rebuttal of Mr. Speck's position. I do not regard a five-year period (actually four years in this appeal) during which to show a profit from such an operation as unreasonable. I am not aware of jurisprudence which would deny the deductions sought by this appellant during the years in question. This situation might well be one of the few in which a legitimate claim for "start-up costs" should have been considered. I do not regard it as similar in any respect to the recent cases of McClure, [reported at [1988] 2 C.T.C. 2140] in which the question of "start-up costs” was examined. To deny this appellant his claim would be tantamount to suggesting that no taxpayer could formulate a supportable and attainable plan for gettting into business, finance it out of other income, work in it, and promote it during available hours and days, and gradually build it up to a profit making position, while at the same time deducting any "start-up costs" from other income.

As always, a "source of income” must be demonstrated, and from Mold- owan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213 it is clear that such a "source" may not necessarily have "net income” during the years under appeal. The "source" cannot be totally divorced from the "income" as one important element, but the "source" must be shown to exist before such "net income” could possibly, let alone reasonably, be expected. There was little or nothing of a "capital" nature charged by Mr. Speck on the statements of income and expenses for the years in issue — the costs were for repairing automobiles for customers — generically “operating costs" of a business. It was Mr. Speck's calculated gamble that he could charge his customers less than his costs, in order to establish his business. I am fully aware that certain case law might indicate a different result for this appeal — if Mr. Speck had failed in his objective, but I do not need to consider that prospect here. He did not fail and he proved his point within a respectable time frame. The fiscal authorities now stand to benefit from his endeavours as an entrepreneur, and in keeping with the scheme of the Act, as I see it, he should be entitled to the considerations he seeks. Some reasonable balance should be shown between what is expected of the public by the taxpayer, and that which is expected of the taxpayer by the public, particularly if a period of years is involved. While I know it is a totally subjective impression on my part, from his testimony and comportment, I would suggest that Mr. Speck would not have taken these assessments to appeal, had he failed. Perhaps that is the difference. Some support for my view on these appeals may be found in the case of Zavitz v. M.N.R., [1978] C.T.C. 3021 at 3026; 78 D.T.C. 1730 at 1734:

. . . I would suspect that many of the successful business operations in Canada today, at their inception, might well have been similarly judged as hopeless, by all but the entrepreneur himself.

On appeal to the Federal Court, the judgment in Zavitz, supra, favourable to the appellant was upheld, (The Queen v. Zavitz, [1981] C.T.C. 17; 81 D.T.C. 5007), and at page 19 (D.T.C. 5009), it was noted:

. . . In any event I am convinced that the taxpayer is doing everything to make his farming operations profitable and he has every right to believe that he will do so and that he will continue to improve his financial position as far as the farm is concerned. I have no hesitation in accepting his testimony.

The appeals are allowed and the entire matter referred back to the Minister for reconsideration and reassessment. The appellant is entitled to party-and-party costs.

Appeals allowed.