Devendra Varma v. Minister of National Revenue, [1986] 1 CTC 2478, 86 DTC 1342

Rip, T.C.J.:—Dr. Varma, the appellant, appeals against notices of reassessment for the 1979 and 1980 taxation years in which the Minister of National Revenue, the respondent, disallowed certain travel and other expenses claimed by Dr. Varma on the basis that the expenses were not incurred to earn income from a business.

Dr. Varma is a professor of English at Dalhousie University in Halifax, Nova Scotia. He has taught at Dalhousie University for the past 23 years and specializes in Gothic romance, which he described as the literature of terror and horror. Dr. Varma is recognized as the world's leading authority on Gothic literature.

Dr. Varma is sought out as a lecturer in, and writer of, Gothic literature. he has lectured throughout the world. He has also written articles in numerous periodicals and learned journals and has assembled the writings of several authors of Gothic literature and has had them published; when an author’s work is published Dr. Varma usually edits the original writings and may write an introduction to the book.

In preparation of the books — and as an offshoot for the preparation of his lectures and articles — Dr. Varma carries on what he refers to as "literary archaeology". He seeks out, amongst other things, unknown authors and their works and the missing works of known authors. He tries to assemble the minor works of major authors and the major works of minor authors. Each summer, after the end of the academic term, Dr. Varma travels to Europe for about a month for his research and to contact other academics. His searches take place in forgotten libraries of European castles, the British Museum, and amongst old papers of families whose ancestors were writers. Dr. Varma stated missing Gothic novels could be anywhere and it was his function in life to find them. He searches out the authors and their works in order to construct the story of the authors’ lives and their respective contributions to literature.

He testified that the contacts with academics allow him to discuss current projects and to assist in determining the potential market for his works. In Europe he engages in negotiation and discussion with publishers.

Dr. Varma’s first book was ‘"The Gothic Flame” published in 1957; this book was a history of the Gothic novel in England and reflected the dark side of the human soul, explained Dr. Varma. He also wrote “The Evergreen Tree of Diabolical Knowledge" which was published in 1972. He also assembled the works of Joseph Sheridan LeFanu which he had published under the title “The Fortunes of Colonel Torlogh O’Brien". Similarly he engaged a publisher to print in 1984 ""The Monk" by Matthew Lewis, a work which was originally published in 1796. Dr. Varma attempts to find all the works of each Gothic author and compile them into one volume.

Dr. Varma receives a royalty for the novels equal to ten per cent of the sale price. For “The Gothic Flame” he continues to receive about $200 to $300 per year. For articles he receives what he describes as a “small pittance ’, generally around $200 per article.

The potential purchasers and the targeted market for the novels are university libraries; Dr. Varma explained there is a scarcity of works of this type and university libraries are not “saturated” with literature of Gothic authors and their works as they are, for example, with Shakespeare.

In Dr. Varma’s view the market for his books in the years under appeal was poor due to a poor economy. The budgets of university libraries were limited and the libraries simply did not have funds available to purchase books of the type written by Dr. Varma and, as a result, publishers were leery of publishing his books.

Dr. Varma has received travel grants for research from the Canada Council and the administration of Dalhousie University. The grants did not cover the expenses incurred.

In 1979, Dr. Varma’s revenue from his writings and lectures aggregated $3,956, of which $2,462 was grants. He included any grants he received as income from a business. In 1980, he earned $2,241, of which he reported $1,180 from grants. In 1981, the year in which he reported the highest income as an author, his income was $12,522, of which he reported $11,829 from grants. From 1976 to 1984, he reported earnings of $37,375 from royalties, grants and sundry honorariums. He claimed expenses of $14,860 in 1979, $16,404 in 1980 and $24,586 in 1981. During the years 1976 to 1984 he claimed expenses of $129,698.24. In no year prior to 1976, after 1984, or during the years in between did he report income from his works in excess of his expenses.

His expenses included the costs of a studio in his home, which he says he uses for correspondence, writing and maintaining his records, travel and accommodation, books and journals, office supplies and service, capital cost allowance, bank charges and interest and accounting and legal.

Dr. Varma says trends are improving and that “better days are coming” so that he will be able soon to show a profit. He also stated that the time lag between research and publication also led to his losses. He stated that even when one carries out research one does not know if the work will be published because publication depends on economic conditions.

Dr. Varma indicated he feels responsible to ensure that Gothic literature is raised to greater heights of acceptance. Money is given to him by way of grant to promote scholarship. “You need assistance to go forward,” he said. His works enhance the reputation of the university as well as his place in academia, he admitted. He feels it is his job to fill in the holes of missing works so that he may leave something for posterity and Canada.

The appellant submitted no evidence to support his contention that he was Carrying on a business, that the expenses claimed were laid out for the purposes of earning income from a business, or that he had a reasonable expectation of profit from writing and speaking. There was no evidence that the appellant would ever earn income to cover his past expenses; Dr. Varma testified he expected to show a profit in several years.

Dr. Varma’s counsel argued that the words ‘‘reasonable expectation of profit” found in the definition of “personal or living expenses” in subsection 248(1) of the Income Tax Act (“Act”) are not relevant to the facts in this appeal.

The definition of “personal or living expenses” relates to “property” maintained by the taxpayer and Dr. Varma maintains no property in respect of his work as an author, argued his counsel.

Paragraph 18(1)(h) of the Act, which prohibits the deduction of personal or living expenses in computing income from a business, excludes travelling expenses from this prohibition. Mr. Harris added that the definition of “business” in subsection 248(1) of the Act does not make any reference to “reasonable expectation of profit”. Therefore, he submitted, a business need not be carried on with a reasonable expectation of profit. Mr. Harris also asked the Court to ignore what he described as obiter dictum of Dickson, J., as he then was, in Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213 where, at 313 (D.T.C. 5215), the present Chief Justice states:

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: Dorfman v. M.N.R., [1972] C.T.C. 151; 72 D.T.C. 6131 . ..

I am of the view that this Court cannot, and should not, ignore the reasons for judgment of the Supreme Court of Canada, even those portions which may be obiter dicta. I do not agree that the above passage, which states a principle of law and confirms the ratio in the Dorfman (supra) case is obiter, and I adopt this passage as part of these reasons.

The word “business” indicates a commercial intent. No business is carried on for the purpose of losing money. A business is a source of income from which there must be a reasonable expectation of income.

There is no evidence that Dr. Varma will ever recoup his losses incurred over the years; there was no evidence to show when one may reasonably expect Dr. Varma to have one year that is profitable. No evidence was adduced to show, for example, how many books are included in a single printing of one of his books, and relate this to how much money Dr. Varma could be expected to receive from this book by way of royalties. The evidence of the appellant was based on the hope and expectation of some day receiving profits; Dr. Varma stated that as he increases in age he will travel less and therefore the royalties will be greater than his expenses.

The work undertaken by Dr. Varma indeed may have dominated his life. However the expenses he incurred were not in respect of a business, but rather, to further his academic credentials and reputation; these expenses, then, were not laid out to earn income from a business.

The appeal will therefore be dismissed.

Appeal dismissed.