Roger Schip v. Minister of National Revenue, [1983] CTC 2221, 83 DTC 190

Guy Tremblay:—This appeal was heard on May 25, 1982, in the City of Toronto, Ontario.

1. The Point at Issue

In accordance with the pleadings of the parties, the issue is whether the appellant, a full-time teacher, is correct in deducting, in the computation of his income for the taxation years 1977 and 1978, the net losses of $10,794 and $7,430 respectively. According to the appellant these losses are claimed in the operation of a free-lance fine art photography business. He even foresees a time when the business becomes his sole source of income.

The respondent disallowed the losses on the basis that the alleged business had no reasonable expectation of profit and, therefore, that the expenses were personal expenses in accordance with the wording of the Income Tax Act, SC 1970-71-72, c 63, as amended.

2. The Burden of Proof

2.01 The burden is on the appellant to show that the respondent’s assessments are incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment, the Court decided that the assumed facts on which the respondent based his assessment, or reassessment, are also deemed to be correct. In the present case, the assumed facts are described in the reply to notice of appeal as follows:

1. In reporting his income for the 1977 taxation year the Appellant reported income of $524.00 and expenses of $11,318.00 for a net loss of $10,794.00 from an alleged business of free lance photography.

2. In reporting his income for the 1978 taxation year the Appellant reported income of $942.00 and expenses of $8,372.00 for a net loss of $7,430.00 from an alleged business of free lance photography.

3. In assessing the Appellant for tax for the 1977 and 1978 taxation years the Minister of National Revenue disallowed the deductions of $10,794.00 and $7,430.00 respectively on the following assumptions:

(a) the facts hereinbefore admitted: (those facts described in paragraphs 1 and 2 quoted above)

(b) during 1976 the Appellant received $150.00 in income while incurring $6,715.00 in expenses in operating his alleged free lance photography business;

(c) at all material times the Appellant was employed full time as a teacher at Ryerson Polytechnical Institute;

(d) at all material times the Appellant had no reasonable expectation of a profit in conducting his free lance photography activities;

(e) at all material times the Appellant was not in the business of free lance photography with a reasonable expectation of a profit;

(f) the expenses incurred by the Appellant in respect of his free lance photography activities were personal expenses.

3. The Facts

3.01 At the beginning of the trial it was admitted by both parties that the loss for the year 1977 is not $10,794 as alleged in the pleadings, but $8,972.

3.02 The appellant is 33 years old and has been a teacher of photography at Ryerson Polytechnical Institute since 1975. It is not a “tenure stream position”; he has only a sessional contract. He is hired to teach on a full-time basis for the duration of a school year. However, he is not paid for the summer. He must reapply each year in order to be hired to teach again. During the years 1977 and 1978 he was teaching approximately 22 hours per week (SN pp 5 and 6).

3.03 The appellant was born in Seattle, Washington, He started studying art at the University of Washington in 1968. In 1970-71 and 1971-72, he completed a two year program in photography at the Everett Community College in Washington State. He received an associate of arts and sciences with honours for his studies in photography. He then transferred to Ryerson Polytechnical Institute in Toronto, where he studied for three years. In 1975 he received a bachelor of applied arts in media studies (the study of fine art photography). While he was a student he produced fine art photography prints. Many of them were shown in an international exhibition (SN pp 4, 5, 7, 37 and 38).

3.04 Fine art photography is photographs which are purchased by private and commercial galleries, collectors, or museums. They are not commmer- cial illustrations. The appellant filed two pages showing photographic exhibitions from 1972 to 1981 (Exhibit A-1) (SN p 22). He also filed as Exhibit A-2 “Artmagazine 41 (November/December 1978)”, a Canadian magazine wherein at p 8 of the insert entitled “Artfocus 41 The Season in Review”, one can read “Roger Schip at Déjà Vue (September 9 - October 5)”. Filed as Exhibit A-3 was a book entitled “Exposure”. This is a catalogue of Canadian contemporary photographers which was assembled by the Art Gallery of Ontario. On page 136 can be seen one of the appellant’s photographs (SN p 24).

3.05 The appellant said that he received grants from the Ontario Arts Council and the Canada Council, and that in both cases there are juried competitions. In the brochure “Aid to Artists” published by the Canada Council (Exhibit A-5) at p 4 is explained the requirements of eligibility as follows:

For the purposes of the Aid to Artists Program, the word “artist” means any individual whose professional activity is essential to the arts; for example, in theatre it applies not only to actors and directors but also to critics, technicians, administrators, etc.

The grants are intended for professional artists; that is, those who have finished basic training or have the necessary competence to be considered as professionals within their discipline. (Doubtful cases will be resolved by jury.)

The appellant received his grant from the Canada Council as a professional. He did, in fact, receive $3,951 as indicated in a grant notification dated April 9, 1981, which advised him that he would be receiving same under separate cover (Exhibit A-4) (SN p 26).

3.06 Four letters from the Ontario Arts Council to Roger Todd Schip were filed as Exhibit A-7 sending him the grants. In fact from 1979 to 1982, he received $1,000 (1979), $2,000 (1980), $308 (1981) and $2,980 (1982). These grants are available only to professional artists, not to hobbyists.

3.07 The appellant filed as Exhibit A-8 a page entitled “R Schip—Income/ Employment 1973-1981”. That document indicates photo business gross income, deductions and losses as follows (1974 to 1981):

The gross income for 1981 includes the grants received from art councils.

3.08 The respondent filed as Exhibit R-2 the statements of operation of the appellant for the years 1976 to 1980 (SN p 44).

3.09 Those statements indicated the following business mileage:

The appellant said that the automobile is necessary because he photographs landscapes. Moreover, the photographic equipment is heavy and it would be difficult to carry without an automobile (SN p 66).

3.10 In cross-examination he explained that he purchased photographic material in 1976 for $2,837 (photographic paper, chemistry, framing material, small pieces of equipment, mount board for mounting the images, SN p 52); in 1977 for $1,395 (spot metre, lens, speed graphic camera, print storage cupboard, SN p 53).

3.11 In cross-examination he said that since 1976 his work has improved:

It has grown, it has matured, the original work is still quite strong and stands on its own. (SN p 56)

The work I am generating now (in 1982) is quite different from that (in 1977). It is stronger in some ways . .. There is technical improvement in it, certainly. (SN p 60)

3.12 Still in cross-examination, he said that the criteria that the Council uses in deciding to give a grant is that one be “professional in terms of your training and the quality of your work”. (SN p 61) He said it is a reasonable way to consider the awards given by the Councils because his work is good and they want to promote the continuance of his endeavours. (SN p 62)

3.13 In cross-examination he said his interest in fine art photography has increased since 1975. He based this opinion “on gallery attendance and the number of photographic galleries which have opened, increased interest by corporate purchasers of works, for example, articles discussing this, knowing people who run galleries, talking to them, seeing the attendance at photographic shows.” (SN p 62)

3.14 In re-examination, he said that a work which sold for $120 in 1977 would sell for three times that amount in 1982. (SN p 66)

3.15 In main examination, Mrs Gail Fisher-Taylor, photography publisher and editor, testified that:

(a) She was founder, publisher and editor of “Photocommunique”, a journal that deals with photography as a visual art form.

(b) As background, she has a Bachelor of Fine Arts from the New School for Social Research and Parsons School of Design in New York City. She has worked as photography researcher, as commercial photographer, as art editor, and as critic of fine art photography for a number of publications in Toronto, in the USA and in Europe.

(c) Being a critic in fine art photography has been her area of expertise since 1976. She has worked for many magazines: Print Letter (Switzerland), American Photographer (USA), Art Magazine (Canada), US Camera (USA), Popular Photography (USA) and Photography Annual (USA).

(d) “Internationally the fine art photography field has grown incredibly, and in Canada it has grown specifically within the last four or five years. Canada seems to be a little bit behind the States in this development. In the States photograph has become quite a big business. There are a number of large galleries that are now multi-million dollar businesses. In Canada, the growth has been much slower. The Canadian art scene is much more conservative. The public really needs to be educated, and I think the galleries are doing that, and the large number of shows, the increase in shows over the last number of years has really helped to increase the market. One thing that has happened though — the market is Still fairly conservative, in that the photography that is most often bought is that which is most established, so the older the photographer is and the longer the photographer has been exhibiting and the more reviews and publicity the photographer has, the more that work is being purchased, because it is bought often by corporate collectors and individual collectors as an investment.” (SN pp 70 and 71)

(e) In 1976 in Canada there were no commercial galleries outside of Toronto or Montreal. “There are a number of art galleries that are exhibiting photography and it has increased, I would say, even over the last year or two years. The concentration of photography galleries is in Toronto. There are a number in Montreal as well. There are a number of cooperative galleries which the artists rent spaces in, across the country. As far as commercial galleries in other areas, there is one commercial gallery in Calgary that exhibits a lot of photography and it is primarily a fine art photography gallery. There is a gallery which is no longer open to the public, but is still operating on an appointment only basis out of Vancouver. As far as other commercial galleries in the country that are exclusively photographic galleries, I don’t know of any more.” (SN p 72)

(f) In Toronto, there are: Déjà Vue Gallery, the Art Gallery of Ontario, the Canadian Centre for Photography, the Harbourfront, the Toronto Cooperative Gallery, the Burton Gallery and a number of others called parallel galleries “which are artist run spaces”. (SN p 74)

(g) She met the appellant in 1977 when he was correspondent for Print Letter.

(h) She is a juror of the Ontario Arts Council jury and the Canada Council jury. She remembered that there was no debate on the appellant’s work and that there was a unanimous decision on the part of all members.

(i) Concerning the earnings of artists:

. . .it is very low. I know there was a brochure that was published by Canadian artists representatives organization that was entitled, I think, The Cost of Earnings of a Visual Artist and essentially what this report stated was the result of a study that was done by Judy Gowan, the spokesperson of this organization. The organization, if you are not familiar with it, is I would say a political organization, in a way, for artists. It is for helping the financial situation of the artists and also for finding out more information, lobbying for legislation that will help artists to continue their work, but in this brochure, I do not have a very good recollection of what the figures were, but essentially it showed that artists earnings are usually very very low, often the cost of production of art work is much much higher than the income from that art work. . . . I think it has to do with the fact that the public is still being educated about art, that the costs of doing art, especially the cost of doing photography is very very high. The time involved in producing a work of art is phenomenal in relation to the kind of return that is gotten on a piece of art work. There are a limited number of places that photography or any other kind of art form are selling, and there is a limited, I wouldn’t say a limited, I would say that people are becoming more aware of art as an investment, as well as art appreciation but that is a very slow process. (SN pp 77 and 78)

(j) She believes that the appellant is now a committed artist:

Q. do you see him making a living from this?

A. Well, I think it depends on the way the art market goes in Canada. I don’t know of any photographers at the present time in Canada that are making their living completely from the work that they sell. I think as the market develops in Canada that there is a potential of that. There are artists in the States and photographers in the States that are earning their living exclusively from sales of work, and Canada seems to follow what happens in the States.

Q. In your view, will that develop here in Canada?

A. I hope it does. I think it depends a lot on factors that are unpredictable. I think support of the arts by institutions such as Canada Council, the Art Bank, the National Film Board, as long as they continue, as long as the galleries are able to stay open, that there is a very definite possibility that photography will be more and more accepted, more and more collected. Also as the prices of paintings and sculpture and other art work go up, photography relative to them is a very inexpensive art medium to purchase and I think the escalation of all those prices will also, in a way, help photography, because if photography is less expensive for collectors, who cannot afford art forms, they are starting to collect photography. (SN pp 79 and 80)

3.16 In her testimony, Mrs Sandra Ball, owner of Déjà Vue Gallery in Toronto, testified that:

(a) She obtained a degree in teaching, including art history, at McGill University. In 1957, after marrying and bringing up her family, she started the Déjà Vue Gallery on Scollard Street in Toronto. It is exclusively photographic art. Canadian and internationally well-known photographers had exhibitions of their works in that gallery. Some of the appellant’s works are constantly in the gallery, with works of other artists, available for the public to see at any time.

(b) The appellant is considered as a very professional fine art artist of high quality. (SN p 83)

(c) “.. . It takes a great deal of exposure and education for people to become accustomed to unknown artist’s work to start with . . . they need the support of continuing exhibitions and continuing visual exposure to accept work, and that is the reason for the lack of sales. The sales will come with the exposure.” (SN p 84)

(d) The Déjà Vue Gallery receives an average of a thousand people every week. Three annout cements from the said gallery for exhibitions of the appellant were filed as Exhibit A-9.

(e) In 1975 the price of a work by the appellant was $100, now in 1982 it is between $300 and $400.

(f) It took 3 years for the gallery “to really see any kind of profit.” This is due to “the education of the public, more collectors, more interest in buying prints.” (SN p 88)

(g) She does not think that there are many artists who made a living by doing this work in fine art photography. “I think there are some who have been highly promoted and recognized through publications and I would have to agree that there are very few who would live solely off their sales of prints.” (SN p 89)

(h) She knows some photographic artists (such as Freeman Patterson and Karsh) who make a profit from their art.

3.17 In her testimony, Mrs Irena Schon, assistant curator at the Burton Gallery of Photographic Art, testified that:

(a) Burton Gallery shows exclusively fine art photography. It was opened in 1981 and there are two shows a month, one for international fine art photography. (SN p 91)

(b) She came instead of Mrs Valerie Burton, the director of the gallery, who was to have been at the trial but was unable to since she was in New York because there were several auctions of photographic art. This is a recent phenomenon in that field of art.

(c) Her views as to what is happening with Canadian fine art photography are as follows:

Well I would say it is finally beginning to come into its own. I think there is a lot more interest in it than there has been in the last few years. Certainly I have noticed in our gallery collectors are becoming more interested in Canadian photography, although we do sell more historical and international photography than Canadian. There seems to be just more of an interest generally in terms of publications, in terms of how many galleries are dealing with photography, in terms of how many public galleries are showing, critical writing has definitely increased. (SN pp 92 and 93)

(d) There are no hobbyists or amateurs at Burton Gallery. The appellant is a professional in fine art photography with definitely high quality work. The quality of the appellant’s work, his degree of experience, and exposure are elements which were considered when the Burton Gallery made the decision to take him. However “it takes a long time to develop a reputation to the point where you can make a living at it.” (SN pp 94 and 95) The price of the work rises with the reputation. “It depends on many things, but I would say that the more exposure a photographer has had the more promotion, and the photographer has been published, that the prices rise.” (SN p 95)

(e) She believes that the appellant has a good future with her gallery. She even thinks that in 1982 the National Film Board could buy from 15 to 20 pieces of the appellant’s work.

3.18 In his testimony, Mr Donald A Carroll, chairman of the Department of Film and Photography at Ryerson Polytechnical Institute testified that:

(a) His background, before having the present function, was “sixty per cent active television production . . . and forty per cent in television film (starting first at CBC television station in Calgary).” He has a Masters from Syracuse in television and radio.

(b) He hired the appellant at Ryerson as sessional teacher (six-month or one-year appointment renewable on same basis). The appellant has the ability to teach “and at the same time look very relevant in front of his students . . . ability to stay outside, to stay up to date, to face making a dollar . ..”

(c) Concerning whether the appellant has a reasonable expectation of profit in fine art photography:

I wish I could give you an unqualified yes, but I just spent five years in tape and film in this country, and it is a really tough, tough business, especially in fine art photography, and I would say that with his tenacity and ability of the people I know at the moment, he would have, in the top ten per cent chance of making it, yes. I think he will but I don’t know quite well enough yet to give an unqualified yes. If anybody is going to, it would be Roger, I think. (SN p 104)

4. Law—Cases at Law—Analysis

4.01 Law

The provisions of the Income Tax Act involved in the instant case are 18(1 )(a), 18(1 )(h) and 248 (definition of “personal or living expenses”). The latter definition reads as follows:

“Personal or living expenses” includes

(a) the expenses of properties maintained by any person for the use or benefit of the taxpayer or any person connected with the taxpayer by blood relationship, marriage or adoption, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit,

(b) the expenses, premiums or other costs of a policy of insurance, annuity contract or other like contract if the proceeds of the policy or contract are payable to or for the benefit of the taxpayer or a person connected with him by blood relationship, marriage or adoption, and

(c) expenses of properties maintained by an estate or trust for the benefit of the taxpayer as one of the beneficiaries.

4.02 Cases at Law

1. J L Escudero v MNR, [1981] CTC 2340; 81 DTC 301;

2. J Shiewitz v MNR, [1979] CTC 2291; 79 DTC 340;

3. Luella Kerr Booth v MNR, [1979] CTC 2654; 79 DTC 595;

4. Moldowan v The Queen, [1977] CTC 310; 77 DTC 5213.

4.03 Analysis

4.03.1 The preponderance of the evidence is to the effect that the appellant is a professional in fine art photography, and the Board is even ready to accept that, since 1975, he was in business. Indeed, the appellant not only has an important educational background (para 3.03), but he had many exhibitions between 1972 and 1981, and many articles were published in Art Review about him (para 3.04). Moreover, he received many grants from the Ontario Arts Council and the Canada Council. One of the requirements to receive the said grants is that “one be a professional” (paras 3.05 and 3.06) in terms of training and the quality of the work (para 3.12). Moreover, very qualified witnesses testified about the professional work of the appellant (paras 3.15, 3.16, 3.17 and 3.18).

4.03.2 The crux of the matter, however, is whether that business had a reasonable expectation of profit. If not, the expenses must be considered as “personal or living expenses” pursuant to the definition of those words quoted above.

4.03.3 It is important to know what is meant by “reasonable expectation of profit”. There is no definition of the expression in the Act. The Courts, however, have many times given their opinion about it. Probably the most cited quotation is the decision of the Supreme Court of Canada in the Moldowan Case:

There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer’s training, the taxpayer’s intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive. The factors will differ with the nature and extent of the undertaking: The Queen v Matthews (1974), 28 DTC 6193. One would not expect a farmer who purchased a productive going operation to suffer the same start-up losses as the man who begins a tree farm on raw land.

4.03.4 If one considers the gross income and the expenses of the Exhibit A-8 from the years 1974 to 1978 (para 3.07), it does not seem at first glance that a reasonable expectation of profit would be possible, despite the competence of the appellant.

However, in the Moldowan case quoted above, the Supreme Court stated (and special attention should be given to the portions underlined by me) that the factors differ with the nature and extent of the undertaking. In the said case (horse-racing activities), the Court referred to the Matthews case wherein Mr Matthews operated two properties as tree farms. Despite the fact that they were not a source of immediate income and might not be a source of income for many years to come (it takes time to grow trees), the Federal Court of Canada decided that. Mr Matthews carried on a business with a reasonable expectation of profit.

4.03.5 In the instant case, that is in the field of fine art photography, the evidence is to the effect that in that field . . it takes a long time to develop a reputation to the point where you can make a living of it” (Mrs Irena Schon, para 3.17(d); . . I would have to agree that there are very few who would live solely off their sales of prints” (Mrs Sandra Ball, para 3.16(g));

. that artists’ earnings are usually very, very low, often the cost of production of art work is much much higher than the income from that art work”; however, . people are becoming more aware of art as investment, as well as art appreciation, but that is a very slow process” (Mrs Gail Fisher- Taylor, para 3.15(i)); . I don’t know of any photographers (in art photog raphy) at the present time in Canada that are making their living completely from the work that they sell” but in the United States, there are some photographers in art photography “that are earning their living exclusively from sales of work, and Canada seems to follow what happens in the States” (Mrs Gail Fisher-Taylor, para 3.15(j) ). The evidence is also to the effect that “Internationally the fine art photography field has grown incredibly, and in Canada it has grown specifically within the last four or five years. Canada seems to be a little bit behind the States” (Mrs Gail Fisher-Taylor, para 3.15(d)).

4.03.6 The Board thinks that the above quotations well summarize the expectation of profit in the field of fine art photography in Canada.

Concerning the appellant, Mr D A Carroll (para 3.18(c)) said:

I would say that with his tenacity and ability of the people I know at the moment, he would have, in the top ten per cent chance of making it, yes. I think he will, but I don’t know quite well enough yet to give an unqualified yes. If anybody is going to, it would be Roger, I think.

4.03.7 Can it be said that because of the nature of fine art photography adduced in evidence, including the distinctions made by the qualified witnesses, that the preponderance of the evidence is in favour of the appellant’s thesis? Unfortunately for the appellant, the Board does not think that it can reach that conclusion.

However if, in fact during the year 1982 and the years following, the appellant makes profits there would be evidence of a reasonable expectation of profit and then it would be possible to apply the losses of the former years pursuant to paragraph 111 (1 )(a) of the Act.

5. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.