Michael Issacharoff v. Minister of National Revenue, [1988] 1 CTC 2006, 87 DTC 673

Bonner, T.C.J.:—The appellant appeals from an assessment of income tax for the 1981 taxation year. In his return of income for the year the appellant reported the financial results of his activities as an "Author & Lecturer" as follows:

On assessment the respondent disallowed the loss. He did so on the basis that the activities in question did not constitute a business.

The findings or assumptions of fact made by the respondent on assessment included the following:

. . . at no time did the Appellant carry on a business for profit or with a reasonable expectation of profit;

. . . the Appellant received revenues and incurred expenses with respect to his writing and lecturing activities in the 1978 through 1982 taxation years as follows:

Year Lectures Writing			Gross Revenue Expenses		Net Revenue
1978	$430.00	304.00	$ 734.00	$ 6,385.11	($ 5,651.11)
1979 310.00		116.77	426.77	6,493.40	( 6,066.63)
1980 540.00		525.30	1,065.30	9,101.24	( 8,035.94)
1981 600.00		70.30	670.30	10,253.91	( 9,583.61)
1982	50.00	82.00	132.00	9,847.41	( 9,715.41)
			$3,028.37	$42,081.07	($39,052.70)

The onus is, of course, on the appellant to establish that the respondent erred in making such findings or assumptions.

The appellant was the only witness called at the hearing of the appeal. He is employed by the University of Western Ontario as a professor of French. He has held that position since 1978. From 1972 to 1978 he served as an assistant professor of French at that University. He is a member of a number of professional and learned societies. The following are areas of special interest to the appellant: (a) French literature of nineteenth and twentieth centuries, (b) poetics of fiction, (c) semiotics of drama, and (d) literary theory.

The appellant is either author or editor of the following books:

J-K. Huysmans devant la critique en France (1874-1960)

Paris: Klincksieck, 1970

L'Espace et la nouvelle

Paris: José Corti, 1976

(Ed.) Langages de Flaubert

Paris: Lettres Modernes, 1977

(Ed.) Sartre et la mise en signe

Paris: Klincksieck & Lexington: French Forum, 1982

La Spectacle du discours

Paris: José Corti, 1985

(Ed.) On Referring in Literature

Bloomington: Indiana University Press, 1987

(Ed.) Performing Texts

Philadelphia: University of Pennsylvania Press, 1987

Discourse as Performance

Stanford: Stanford University Press, 1988

Le Discours comique

Paris: José Corti, 1988

The seventh work is to be published in November of 1987. The eighth and ninth are to be published in 1988. The appellant's activities as an author and editor generate revenues in the form of royalties. In addition, when the appellant serves as a consultant he receives a fee or honorarium for services rendered in reading manuscripts. As a lecturer he receives fees or honoraria for lectures or services as a visiting professor.

The appellant commenced his writing and lecturing activities in 1973 or 1974. His normal practice since then has been to work approximately 66 hours a week. During the academic year 33 of those hours are devoted to teaching activities at the University. The balance of his working time is normally devoted to writing and lecturing.

Initially the appellant's publisher was Librarie José Corti. It is a firm which the appellant described as small and prestigious and as a specialist in literary theory. The appellant's first publishing contract with that firm was entered into on September 30, 1975, with respect to the appellant's work, L'Espace et la nouvelle. The contract provided for royalties of ten per cent of the catalogue price. Later the appellant directed his efforts toward the U.S. market for works written in English. That market, the appellant said, is much larger than the market for publications written in French. He arranged for the publication of his more recent works by U.S. firms including the Indiana University Press, the University of Pennsylvania Press and the Stanford University Press. The Indiana University Press was chosen by the appellant because, he said, it is aggressive in marketing and promoting its books. Similarly the University of Pennsylvania Press, which is soon to publish a work of which the appellant is co-editor, is expected to invest heavily in marketing the book. Evidence was introduced indicating that both Universities give wide circulation to catalogues promoting the books which they publish.

A number of the agreements between the appellant and his publishers provide for a threshold level of sales which must be achieved before royalties become payable. One of the contracts, namely that entered into in April of 1981 between the appellant and Jean-Claude Vilquin on the one hand and French Forum, Inc. on the other hand for the publication of the work, Sartre et la mise en signe, does not require the publisher to pay any royalties at all. It requires the authors to pay the publisher $1,200 to subsidize expenses incurred by the publisher in typesetting, printing, binding, shipping and posting the book and advertising and promoting it for sale.

The appellant admitted that the primary market for his works consists of students and academics. He said, however, that his writings are scholarly, but not to the extent that they are not intended for non-scholars. It would appear to me that the topics chosen by the appellant are of such limited interest that substantial sales volumes are unlikely to be achieved. Certainly, there is no foundation in the evidence for a conclusion that sales of works covered by the more recent publishing contracts will exceed the threshold levels laid down in the contracts.

The revenues and expenses of the activities now in question during the period 1978 to 1986 are summarized on Exhibit A-15 which is reproduced as Schedule A* to these reasons. There is no basis in the evidence for a conclusion that revenues from royalties are likely to increase substantially. The appellant's consulting activities have generated one $100 fee for reading a manuscript. The lecturing activities, which have generated less than $1,050 in all, include honoraria paid by universities for services as a visiting lecturer including a stint of four weeks at the University of Jerusalem. The "honoraria" listed on Schedule A as paid to the appellant in 1985 and 1986 were also said to be for lectures given. The sums of $8,311 and $5,000 listed as grants paid in 1983 and 1984 were received by the appellant under a scheme designed to supplement his income during a period while he was on sabbatical leave and consequently was paid only 75 per cent of his normal salary. There was some debate on the question whether those amounts could properly be regarded as part of the revenues of the business alleged. More to the point, in my view, is the fact that such grants are not recurrent in nature. In summary, it has not been shown that there exists a genuine likelihood that revenues will increase.

Against the revenues the appellant sets the expenses listed in Schedule A. Those expenses appear generally to be of the sort which result from the activities of an academic and scholar. They include the cost of space in the appellant's home, which space is used for his library and computer. As well they include the cost of attending academic conferences which the appellant described as a central part of his activities. He attends them to read papers, to chair sessions and to maintain contact with colleagues in his field. Further, at such conferences he meets publishers. His travel expenses cover the cost of transportation and accommodation connected with summer trips to France and England for the purpose of research in libraries there. The appellant stated that he expected that in future his expenses would drop sharply because many of them were attributable to his activities in co-editing books, an activity which he expects will decrease. He did not indicate the extent to which expenses would drop.

In summary the evidence portrays the appellant as a committed and energetic academic who utilizes all time available after the discharge of his teaching duties to research, investigation and analysis of matters of interest to him. He communicates the results of his work by writing papers and books and by delivering lectures. In carrying on such activities the appellant earns a modest stream of revenue, but he consistently incurs substantially greater losses.

The essential question raised by this appeal is whether the activities giving rise to the loss now in question constitute a business. Those activities cannot be regarded as a business unless they are carried on with a reasonable expectation of profit. In William Moldowan v. The Queen, [1977] C.T.C. 310 at 313; 77 D.T.C. 5213 at 5215 Dickson, J. (as he then was) stated:

Although originally disputed, it is now accepted that in order to have a "source of income” the taxpayer must have a profit or a reasonable expectation of profit. Source of income, thus, is an equivalent term to business . . .

Subjective optimism will not meet the test. In Paul Zolis v. M.N.R., [1987] 1 C.T.C. 2199 at 2201; 87 D.T.C. 183 at 185 Couture, C.J.T.C. stated:

The aspirations or ambitions that a taxpayer may have entertained in respect of an activity in which he was engaged are not alone sufficient to bring it within the strict meaning of business in the relevant legislation no matter how genuine they might have been.

The activities of 1981 must be viewed in light of the evidence of similar activities in prior and subsequent years. In the three years prior to 1981 the appellant’s expenses exceeded his revenues by a ratio of almost 10 to 1. There is no basis in the evidence for a conclusion that in 1981 circumstances had changed to such an extent that a profit could be foreseen or expected. The financial results of subsequent years tend to confirm that in 1981 no reasonable expectation of profit existed. The appeal will therefore be dismissed.

Appeal dismissed.