Kenneth H. Rolland v. Minister of National Revenue, [1987] 2 CTC 2001, 87 DTC 341

Bonner, T.CJ.: —In his returns of income for the 1980 and 1981 taxation years the appellant sought to deduct losses of $6,729.47 and $9,114.84 from operations which he carried on during the years ending November 30, 1980 and 1981, respectively under the firm name “FREEFLIGHT BALLOONS”. In assessing tax the respondent disallowed the deductions. He did so on the basis that the appellant's ballooning activities did not constitute a business carried on for profit or with a reasonable expectation of profit and he therefore concluded that paragraph 18(1 )(a) of the Income Tax Act applied to prohibit deduction of the cost of the activity. He relied further on paragraph 18(1)(h) of the Act.

The appellant was the only person to testify at the hearing. I formed the impression that he was candid in giving his evidence. A summary of that evidence now follows.

The appellant works as an Assistant Nuclear Operator with Ontario Hydro. He has worked in that capacity continuously for a period commencing prior to the years now under appeal. In 1979 the appellant decided that he did not want to spend his working life as an employee. Rather, he preferred to work in his own business, preferably in the tourism industry. After reading a magazine article about hot air balloons he concluded that the field might have potential for him and he started to investigate it. He found, however, that there were few role models available. There were two commercial operations in southern Ontario and two groups which operated balloons used for publicity purposes by corporations which owned them. The appellant found that neither of the two commercial operations was prepared to offer much in the way of advice or information unless he bought a balloon first. Accordingly, late in 1979 the appellant ordered a balloon for delivery in May of 1980.

The appellant occupied himself during the next six months ordering equipment necessary for the operation of the balloon such as inflators and a trailer. He also proceeded with lessons required to secure an operator's licence. He had anticipated that the licencing process would take about a year. In fact it took him twice as long due to difficulties in co-ordinating the attendance of the instructor and of the crew necessary to follow the balloon and recover it after a flight. The "chase crew" was made up of volunteers. The appellant's licence was issued on October 6, 1981. It was the appellant's plan to fly the balloon himself, at least at the outset, and not to employ others for that purpose.

In assessing, the respondent assumed that the appellant was employed by Ontario Hydro on a full-time basis and that in addition to his regular hours the appellant was required to be on call at various times. I cannot find that the employment with Ontario Hydro seriously restricted the ability of the appellant to operate the balloon business in the way he intended. It seems that balloons can best be flown during the two-hour period after sunrise and the further two-hour period prior to sunset. At other times of the day thermal currents and solar heat adversely affect vertical control of the balloon. During part of the year the appellant was able to fit a normal working day between the two optimum flying periods. Further, it was the appellant's plan to restrict operations to the period between May and October. His working schedule at Ontario Hydo was fixed in advance in six- month-long blocks. The appellant found that it was possible to arrange his schedule so that he performed most of his Hydro work during the winter and had 97 days off during the May to October period.

The appellant was not prepared to commence commercial operations immediately following the receipt of his licence in October of 1981. He felt that he needed further flying experience in order to operate responsibly, having regard to considerations of safety. Thus, according to the appellant, in 1980 and 1981 all his expenses were incurred in "getting comfortable” in relation to his flying skills. During those years the appellant earned only “a bit of income” when a group offered to pay his expenses for operating a balloon on a tether. It was not until 1983-1984 that the appellant began barnstorming, that is to say, carrying passengers for hire. It is this activity which generated the revenues upon which the business was dependent, namely, fares paid by passengers and fees paid by persons whose advertisements were borne by the balloon.

Revenues and expenses up to the end of 1983 were as follows:

In my view the losses in issue were not, during the years in question, the losses of a business because during that period no business had yet commenced. The decision of the Exchequer Court of Canada in Gordon Kenneth Daley v. M.N.R., [1950] C.T.C. 254; 50 D.T.C. 877 is squarely on point. In that case the court considered the question whether a taxpayer carrying on the practice of law was entitled to deduct a fee paid for his call to the Bar. At page 261 (D.T.C. 880) Thorson, P. said:

In the first place, the fee of $1,500 which he paid for his call to the Bar and admission as a solicitor in Ontario was an expenditure that was anterior to his right to practice law in Ontario and earn an income therefrom. Except that it was nearer in point of time it was no more related to the operations, transactions or services from which he earned his income in 1946, or in any year, than the cost of his legal education would have been or, for that matter, the cost of his general education or any cost or expense involved in bringing him to the threshold of his right to practice.

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 taxpayer 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".

The same reasoning applies here. Because business operations did not commence before the end of the period now in question, the cost of the activities now in issue does not enter into the computation of profit or loss for purposes of section 9 of the Income Tax Act. Furthermore, their deduction is prohibited by paragraph 18(1)(a).

The appeals will therefore be dismissed.

Appeals dismissed.