Fouad E. Shaker v. Minister of National Revenue, [1987] 2 CTC 2156, 87 DTC 463

Couture, C.J.T.C.:—The appellant in computing his income for his 1979, 1980 and 1981 taxation years deducted losses in the amounts of $7,532.32, $10,591.08 and $5,989.13 which he alleged were incurred in pursuing writing activities. The respondent in assessing the appellant's tax disallowed these losses on the assumption that these activities were not carried on with a reasonable expectation of profit, and therefore they did not constitute the carrying on of a business for the purposes of the Income Tax Act (the "Act").

During the taxation years under appeal the appellant was employed as a full-time teacher by La Commission Scolaire de Chambly, in the Province of Quebec.

He was born in Egypt of Lebanese descent. After completing high school in Egypt in 1946, he was employed by the Al-Abram, an Egyptian newspaper, as a Clerk in its administration division. In 1952 he enrolled in the Law Faculty of the University of Cairo, and after attending evening lectures obtained a Law Degree in 1956 while employed by the newspaper. Upon graduating he was assigned new duties by his employer. He was appointed in charge of the personnel department until 1962 and during this period he devoted some of his time to writing articles for the paper when given this task. He says he wrote approximately ten articles a year between 1956 and 1962, and that this experience allowed him to accumulate research material in anticipation of publishing a book on astronomy and science, a field in which he was particularly interested. During this time, he submitted approximately 25 articles to two local magazines gratis.

Between 1959 and 1961 he attended the University of Cairo to obtain a Master's degree in comparative law, which he did not receive. He also attended lectures on administrative Law. The reason he gave for not securing his Master's degree was that at that time he was contemplating emigrating to Canada, which he did in 1964, and was preoccupied arranging this move. He also studied the English language at the American University in Cairo. In 1962 he was appointed in charge of the circulation department at the newspaper, a position that required extensive travelling throughout Egypt. This allowed him to gather more information in preparation of another book to be entitled "The Raging Nile” that was subsequently published.

In 1964, as mentioned before, he came to Canada with his family. Relying on his prior journalistic experience, he tried to pursue a career in journal- ism. He was hired as a clerk by Montréal Matin, a Montreal newspaper that had recently been created. After six weeks he realized that this job was not going to lead to the career he anticipated so he resigned. He also sought employment at the Montreal Gazette and La Presse as a journalist, but according to his evidence union rules interfered with his being hired.

To earn a living he found work in 1965 as a teacher at L'Académie St- Viateur that lasted four months. In September of that year he was hired as a teacher by La Commission Scolaire de Chambly where he was still employed at the time of the hearing.

After his arrival in Canada, between 1968 and 1971, he took courses in literature, English and Canadian history at McGill University and in 1979 attended Concordia University where he studied at the faculty of Political Science. Between 1964 and 1971 he interrupted all writing activities because he was getting settled and established in this country.

In 1971 he began writing a book that he completed in 1975 entitled "Fire Over Lebanon". This was his first work as a professional writer. The book dealt with the history of Lebanon, past and present, its conflicts and the reasons behind these conflicts. The book was published in 1976 in the United States and marketed in a number of countries including Canada. Approximately 400 copies were sold from its first and only printing of 1,000. He incurred publishing and related expenses in the amount of $7,000.

In 1979 he succeeded, in response to a request by a Labanese publisher, in finding someone in Canada to form a distribution network across the country for a Lebanese magazine. He also agreed to develop new markets for the magazine. As I understand it he received in return a commission of ten per cent of the publisher's sale price for the magazines shipped to Canada. This arrangement continued during 1980, 1981 and 1982. In 1981 he submitted to this publisher a series of 20 articles of which 18 were published and for this he received a fee of $40 per article. His purpose in doing this was to establish himself as a writer in the eyes of the publisher. In 1982 17 articles were accepted for which he was paid $50 each for a total of $850. In 1983 he entered into an agreement in writing with the Lebanese publisher whereby he undertook to write six articles a month for a fee of $1,500. This was subsequently reduced to $1,000 a month, an arrangement that was still apparently in force at the time of the hearing although the agreement was not introduced in evidence.

Further evidence was that he wrote another book entitled "The Raging Nile". It was published in 1979, and dealt with the Egyptian revolution and the story of Nasser. No information was provided regarding the number of copies that were sold, but the appellant had to contribute $4,500 to the publisher to defray part of the publishing costs. It is said that 1,000 copies of this book were printed, but from the information in the appellant's income tax returns for 1979 and subsequent taxation years, it appears that if this book had literary and historical value nevertheless its financial yield was minimal at best.

In 1984 he completed and published another book entitled “Pillars of Atonia”. Again there is no detailed information with respect to the number of copies printed and sold or of the publishing and other related costs.

In addition to the publication of the three books mentioned, the appellant contributed to a book entitled "The Canadian Family tree" published by the Multiculturalism Directorate of the Department of the Secretary of State. This was done under a contract with Her Majesty the Queen in Right of Canada represented by the Secretary of State dated April 15, 1977 for which he received a fee of $3,000 in that year.

The appellant filed a substantial number of acknowledgements that appeared in various publications including the New York Times with respect to “Fire Over Lebanon". They are interesting to read and while they recognize that it had some literary value and the appellant's competence as a writer, they are of marginal assistance in determining whether he was carrying his writing activities with a reasonable expectation of profit during the taxation years under appeal. This determination requires close scrutiny of the evidence submitted to the Court.

In his income tax returns for the relevant taxation years in the box captioned "Type of work or occupation in . . .” he indicated "Teacher & writer” and on an attached “income and expenses" schedule in the box captioned “Business activity” he also inserted "Writing books". A condensed statement of income and expenses for those taxation years and subsequent years is included in a document entitled "Reply to the Reply to the Notice of Appeal" filed on his behalf. It shows:

On the basis of these numbers, it appears at first glance that the respondent is correct in assuming for the purpose of his assessments that the appellant's writing activities for the taxation years under appeal did not offer a reasonable expectation of profit at that time. From the documentary evidence filed with the Court it seems that the appellant had talent, a keen desire and a strong determination to succeed in this field of endeavour but in my view the test that he had to meet required more than hope and effort. What is requisite is evidence that his efforts would within a reasonable period of time transform into a successful commercial undertaking.

Notwithstanding the appellant's qualifications there was no likelihood of his becoming a financially successful author during the years under review. The evidence precludes an objective belief that during this period a reasonable expectation of profit existed. The comments of Dickson, J. (as he then was) of the Supreme Court of Canada in Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213, regarding whether a commercial activity offers a reasonable expectation of profit must be borne in mind. He said at page 313 (D.T.C. 5215):

There is a vast case literature on what reasonable expectation of profit means and it is by no means consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all the facts.

[Emphasis added.]

The evidence with respect to the appellant's authorship and the income derived from that source was not as detailed and informative as it should have been and only in the course of his being cross-examined was his income properly broken down and identified. The facts so disclosed clearly indicate that while the appellant may have pursued his career as an author with fervor his financial rewards from that source fell short of even suggesting that he had a reasonable expectation of profit at least during the period between 1979 and 1985.

For instance for the taxation year 1979 his reported income that is unrelated to his salary as a teacher was $2,268. It was derived from two distinct and separate sources: $800 was a fee for translation work he performed in that year and the balance of $1,468 was exclusively commissions earned under his distribution agreement with the Lebanese publisher. There was no income whatsoever from writing. For 1980 the whole of the amount of $1,997 was also commissions earned from that source.

For the taxation year 1981 more detailed data is in evidence. He reported income of $3,497.60 identified on the return as “sales”. There is, however, other documentary evidence that shows that the amount of $3,497.60 is made up as follows:

18 articles submitted to the Lebanese magazine

The source of the income that is the difference between $3,498 as reported and the itemized amounts totalling $2,327, namely $1,171 is unexplained and consequently is not established as having been from the appellant's work as an author.

Counsel for the respondent asked the appellant whether the number of his books sold in 1981 represented average sales in subsequent years. He replied: “Well, as an average, yes, I can say it.” His returns for the taxation years under appeal indicate that only in 1981 did he receive remuneration from his writings. This was a total of $1,157 ($720 + $437 "Books Sold”, supra). His income from commissions was in no way related and could not be attributed to the income derived from writing activity, and was a source in itself against which expenses incurred for the purpose of earning income from that source may be deducted. However, while it was incumbent on the appellant to do so he failed to adduce evidence regarding what portion, if any, of his expenses for those years are ascribable to earnings from either sources of income. The agreement with the publisher from which he derived his commissions could also be construed as an activity akin to a business. Paragraph 4(1)(a) of the Act defines clearly how income or loss from a source must be computed. It reads:

4(1) For the purposes of this Act,

(a) a taxpayer's income or loss for a taxation year from an office, employment, business, property or other source, or from sources in a particular place, is the taxpayer's income or loss, as the case may be, computed in accordance with this Act on the assumption that he had during the taxation year no income or loss except from that source or no income or loss except from those sources, as the case may be, and was allowed no deductions in computing his income for the taxation year except such deductions as may reasonably be regarded as wholly applicable to that source or to those sources, as the case may be, and except such part of any other deductions as may reasonably be regarded as applicable thereto.

The wording of this provision is clear and its requirements are mandatory. Having concluded that his remuneration from his writing activities and commissions earned under a distribution agreement cannot be assimilated to the same source of income without a proper allocation of the expenses claimed by the appellant to each source I cannot arrive at a proper resolution of whether either source of income offered a reasonable expectation of profit.

For the subsequent taxation years which are not under appeal, but respecting which some evidence was submitted, the result is the same. For instance for the 1982 taxation year the appellant received $850 for articles from the publisher. Particulars filed with his tax return indicate that 30 copies of the book “Fire Over Lebanon” were sold in that year at $7 each for a total of $210 and 11 copies of the “Raging Nile” were sold at $9 each for a total of $99. In addition from January to May he received $796.92 in commissions. The war in Lebanon interrupted these operations for the balance of the year. In a schedule attached to the return and filed as an exhibit he reported as a lump sum $5,619.92 in “professional fees". No breakdown of this amount is provided except the amounts that have been referred to above that aggregate $1,955.92. There is no explanation of the difference between $5,619.92 and $1,955.92, i.e. $3,664. Again while the expenses claimed amounting to $12,406.78 are itemized there is no allocation of them between the different sources of income.

For 1983 the situation is slightly different since the appellant had entered into an agreement in writing with the publisher pursuant to which he received only $800 a month according to revised evidence elicitated in cross- examination. The amount of $1,000 a month had been mentioned in his prior testimony, but he finally admitted to $800 a month. For 1983 the appellant reported income of $19,022 broken down into professional fees of $18,437 and sale of books of $585. His expenses amounted to $24,598.67. Assuming that he received $9,600 ($800 x 12) under his agreement the evidence is silent regarding the difference of $8,836 that is $18,436 - $9,600. It is also mute regarding the allocation of the expenses to these sources.

The same exists for the 1984 and 1985 taxation years. There is no need to review the documentary evidence submitted with respect to those taxation years as it is no more supportive of the appellant's position with regard to his reasonable expectation of profit from his work as an author.

On the whole of the evidence I can only conclude that for the taxation years under appeal the appellant did not have a reasonable expectation of profit from authorship.

For these reasons the appeals are dismissed.

Appeals dismissed.