Justin a Cork v. Minister of National Revenue, [1981] CTC 2367, 81 DTC 346

D E Taylor:—These appeals were heard in Toronto, Ontario, on March 18, 1981 against income tax assessments for the years 1974, 1975, 1976 and 1977. The point at issue for the years 1974, 1975 and 1976 is identical (disal- lowed business expenses claimed), although the amounts in question do vary. That point is expressed in the notices of appeal (as it pertains to the respective years) in the following way:

The business of the appellant consisted, at all relevant times, of providing services .. . to the public as a mechanical design draftsman and of developing prototypes of boats to be marketed.

In carrying out his business . . . the appellant incurred expenses in the aggregate amounts of

1974 — $4,478.08

1975 — 5,112.34

1976 — 9,506.01

The Minister of National Revenue . . . permitted the appellant to deduct expenses of $150 in computing his income from his business.

The issue for the year 1977 is stated to be:

The Minister of National Revenue reassessed the appellant in respect of his 1977 taxation year on the basis that as a result of the increase of the appellant’s income for his 1974 to 1976 taxation years . . ., the benefit (of “general averagings”) pursuant to subsection 118(1) of the Act was reduced.

If the appellant is successful in respect of his appeals in respect of his 1974 to 1976 taxation years, the appellant will be entitled to increased benefits pursuant to the provisions of subsection 118(1) of the Act in respect of his 1977 taxation year.

The Board noted that the sole issue for determination at this hearing was that of the “business” contentions of the appellant. However, any determination of that question in favour of the appellant for the years 1974, 1975 and 1976 could have a bearing on the question of “general averaging” for the year 1977. With respect to the years 1974, 1975 and 1976, counsel for the appellant agreed that certain amounts claimed as deductible business expenses in the relevant tax returns should be deleted, and various amounts noted either in the notice of appeal or the reply to notice of appeal should be ignored. In the end result, it was agreed between the parties that the following statements represented a summary of the amounts involved in the appellant’s contention that he was in business:

1974 EXPENSES — BOAT BUSINESS

Type of Expense	Amount Deducted
Advertising, Promotion	$ 239.69
Convention Expenses	265.32
Supplies, Materials	901.31
	$1,406.32

1974 EXPENSES — DESIGN BUSINESS

Type of Expense	Amount Deducted
Accounting, Legal, Collection	$ 130,00
Automobile Expenses
(gasoline, insurance, repairs)	1,078.97
Business Tax, Fees, Licences	25.00
Fire and Liability Insurance	33.00
Interest, Exchange, Bank Charges	2.00
Office Expenses, Postage, Stationery	87.50
Rent: 2/6 of apartment rent & hydro	1,169.22
Telephone, Light, Heat, Water	99.12
Other Expenses: subscriptions	26.00
	$2,650.81

Aggregate $4,057.13

Minister has allowed $150.

If succeed on Design Business — allow additional $2,500.81

If succeed on Boat Business — allow additional $1,406.32

If succeed on both — add $3,907.13

1975 EXPENSES — BOAT BUSINESS

Type of Expense	Amount Deducted
Advertising, Promotion	$ 281.45
Business Tax, Fees, Licences	52.00
Convention Expenses	705.63
Rent: Workshop	300.00
Supplies, Materials	654.01
	$1,993.09

1975 EXPENSES — DESIGN BUSINESS

Type of Expense	Amount Deducted
Accounting, Legal, Collection	$ 100.00
Automobile Expenses
(gasoline, insurance repairs)	970.13
Fire and Liability Insurance	33.00
Interest, Exchange, Bank Charges	6.00
Office Expenses, Postage, Stationery	122.15
Rent: 2/6 of apartment	1,180.00
Telephone, Light, Heat, Water	141.85
Capital Cost Allowance	400.00
	$2,953.13
Aggregate claimed $4,946.22

Amount allowed by Minister $150.00

If succeed on design business, allow additional $2,803.13

If succeed on boat business, allow additional $1,993.09

1976 EXPENSES — BOAT BUSINESS

Type of Expense	Amount Deducted
Advertising, Promotion	$ 176.43
Business Tax, Fees, Licenses	58.50
Interest, Exchange, Bank Charges	189.42
Maintenance and Repairs
(except automobile, truck)	90.00
Rent (workshop)	800.00
Supplies, Materials	2,343.74
	$3,658.09

1976 EXPENSES — DESIGN BUSINESS

Type of Expense	Amount Deducted
Accounting, Legal, Collection	$ 125.00
Automobile Expenses
(gasoline, insurance, repairs)	2,092.24
Fire and Liability Insurance	33.00
Office Expenses, Postage, Stationery	75.79
Rent: 2/6 of apartment	1,274.40
Telephone, Light, Heat, Water:
2/6 of $600.38	200.13
Travelling Expenses (except automobile)	1, 114.03
Capital Cost Allowance	1,341.15
	$6,255.74

Expenses claimed $9,913.83

Allowed by Minister $443.90

If successful on design business — allow additional $5,701.84

If successful on boat business — allow additional $3,658.09

Evidence

With regard to the “boat interest”, the appellant reviewed his long standing interest in boating, the associations to which he belonged over the years, and his particular interest in building a “racing boat” which was the type in question in these appeals. The entire project was consistent with his training and profession as a draftsman — it was considered by him however to be for a separate and distinct business purpose. His plan for the boat was to race it, and when he had done so successfully, to sell plans, building kits or boats. In his opinion, he had just such a wide range of options available to him at that juncture. He still hoped to do so when and if finances permitted him to finish the boat; hull — however, the cost of material and fuel had now reached levels that made the economics of the project appear very doubtful. Documentation was presented to provide the Board with a perception of his efforts.

On the “draftsman” issue, the appellant described his efforts in some detail, and indicated the use for the office and working space portion of his residence which had been charged. The other expenses were those normally associated with a businessman’s operation. Some support documentation and details of the expenses were provided. In general terms, the factual background of these appeals was similar to that described in Edward Libera v MNR, [1981] CTC 2298.

Argument

Counsel for the appellant made reference to the following case law:

Royal Trust Company v MNR, [1957] CTC 32; 57 DTC 1055;

MNR v M P Drilling Ltd., [1976] CTC 58; 76 DTC 6028;

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

MNR v Henry J Freud, [1968] CTC 438; 68 DTC 5279;

K Huband v MNR, [1974] CTC 2001; 74 DTC 1039;

D A MacEachern v MNR, [1977] CTC 2139; 77 DTC 94;

David Tobias v The Queen, [1978] CTC 113; 78 DTC 6028.

Counsel’s argument was specific and direct, and in my view it can be summed up in these quotations (with regard to the “boat”):

. . . the Moldowan case deals with the issue of farming expenses, but it does make comments on what efforts a person must make in order to have a business as opposed to strictly a hobby.

He is by training suited and capable of designing a rather complex boat of the nature which he has tried to design and sell. . . . we are not dealing here with an Ordinary canoe, an ordinary row boat which the average handyman can put together, we are dealing with a hydroplane which is a very sophisticated piece of machinery, it is not something that the average person could simply design. As the appellant has pointed out, nobody basically makes these boats in Canada, they — most of them are imported.

. . . in the Freud decision Mr Freud has been one of those parties in establishing a company in order to sell a prototype of a car. Many of the backers became dis- gruntled and were not prepared to put any more money into the company, and Mr Freud himself decided to advance certain funds to the company. One of the legal hurdles that Mr Freud had to overcome in that particular situation is that he personally was not incurring the expenditure, whereas I would point out in this situation the appellant Mr Cork is directly incurring the expenses. Notwithstanding that there was a corporate entity interposed between Mr Freud and the business activities, the Court had little difficulty in coming to the conclusion that Mr Freud was involved in an adventure in the nature of trade. . . .

(with regard to the “drafting”)

. . . in his particular factual situation, he should be treated no differently than if he had opened an office in a commercial building nearby and reported to that office each day, and from that office went out and worked . . . — performed services for various persons. Mr Cork must be in a position where he can travel as we have stated considerable distances, anywhere up to 60 miles a day. He must be in a position, and he must incur the expenses to change work locations on a moment’s notice. He is not an employee, he is a self-employed person, he can be told at the end of one day that his services are no longer required. He could be working that day in Stoney Creek, conceivably the next day he may have a contract in Orangeville or in Scarborough or in Oshawa. The automobile expenses I would submit are necessary, they are necessarily incurred by him so that he can travel from what is really his office to the places where he carries out those services. They are not personal expenses in the nature of a person travelling from his own home to his own office in which he travels to daily.

Counsel for the respondent cited cases which included:

Doctor E Ross Henry v MNR, [1972] CTC 33; 72 DTC 6005, which case in turn made reference to Cumming v MNR, [1967] CTC 462; 67 DTC 5312.

He concluded (with regard to the boat):

The question has to be in my opinion with respect to the boat, was Mr Cork in the business between 1974 and 1976 of designing and building boats? This is a matter which in other contexts has been argued before, and that profit needn’t necessarily be shown to start up a business, there are start-up costs of course. That doesn't mean that any kind of expense incurred in the hope of some day making a profit at something are allowable deductions under the Act. The taxpayer must still in order to be allowed to write off these expenses, the expense be of a Canadian taxpayer, show that he was in business that he had a reasonable expectation of making a profit out of this thing.

If I could just review the facts for a second. The boat was begun in 1971 and 1972 by Mr Cork’s testimony. It was shown in 1975 in an incomplete state at that point or as was indicated by the pictures and his testimony as well. The development was slow, obviously in getting this thing going, and that the development was inhibited by lack of capital along the way. But it seems that Mr Cork did not make what in my submission would be a sufficient attempt to raise capital, indeed if it was that which was slowing development and the completion, and ultimately the production of this boat. His testimony was that he had not gone to any of the lending institutions to try to interest them in this kind of venture, that he had gone to quite a number of regattas for which he had charged convention expenses, that he had spoken to people at the club of which he was a member, the Toronto Hydro-Plane Club, and it would seem from the lack of evidence on this that there wasn’t a single person who was interested in putting any money into this venture with Mr Cork.

He thought that he could sell it, or his testimony was, I should say, that he thought he could sell it for around $4,000, he thought he might just sell the plans or that he might sell it as a kit, or that he might sell it as a fully finished boat. But upon questioning there seemed to be no real attempt to see in 1974 to 1976 or at any earlier time, just what it would take to get this business on the road as a commercial venture in terms of how much per unit it would cost to build these things, and in a precise fashion how much — how many units per year would have to be built, what sort of added expenses would have to be accounted for if there was to be any economy of scale on this at all.

His testimony was that he had spent some, well, $5,000 that he had claimed thus far as expenses in respect of the boat. There was no direct evidence, that was some perhaps indirect evidence that the boat would sell for around four thousand or five thousand. So the plan of the boat itself, simply building that boat in my submission does not qualify as a business.

The expectation of profit must be reasonable, and my friend refers to the Moldo- wan case, in which it said that the determination is objective, it is not sufficient that a taxpayer or Mr Cork or anyone else have some hope that this things [sic] might some day bear fruit, and that he would keep working away at it in his own time with his own money and basically see what happened on a year to year basis.

(with regard to the “drafting”)

In the present case the work (done by Mr Cork) is not substantial, in fact I believe the testimony was that the work was not substantial and that it wasn't billable as well.

And in my submission the fact that magazines are read or jobs are looked for in this room, or that billings are sent out once a week for the work done — already worked, is not sufficient to allow the taxpayer to write off the expenses of the office, the rental, capital cost allowance, heat, light, water and everything else, a portion as he did as business expenses, notwithstanding that we have taken the position from which we are not backing down now, that the taxpayer Mr Cork was a self-employed draftsman.

If you find that the office was his home base in so far as sufficient work was done in his office to make travel to and from his office, and the claims in respect of the cost of keeping that office claimable, I would submit alternatively that two sixths is too high a proportion on the evidence. Something in the nature of one fifth or one sixth would be more in keeping with the evidence given by Mr Cork today.

. . . With respect to travel and automobile. This deals directly again with the home base . . . where Mr Cork lived in the years 74 to 76. It was no more than his home with a room in which he did his billings then I would submit to you that except for the Thorold expenses in 1976 and the Stoney Creek expenses in 1976 for jobs which were done at those places, that this was simply the ordinary expenses of going to work and coming back from work, which are specifically excluded by paragraph 18(1 )(h) of the Act as living and personal expenses.

Findings

The matter of the determination of whether or not a taxpayer is in “business” was dealt with at some length in the recent decision of Wesley H Warden v MNR (in this release). In the instant matter, the Minister contended that “building the boat” was not a “business” or that it should be included even in the extended definition of that term as “a venture in the nature of trade” as one might use the term “in the business of building boats". The Minister’s position may appear very logical — however, there is a considerable similarity between the operation of “building the boat” in this case and that of “building the car” in Freud (supra). Counsel for the appellant relied heavily upon Freud (supra) and contended that when (and if) the boat had been completed and successfully raced, the appellant had options of (a) selling copies of the design drawings; (b) constructing and selling basic assembly “kits” for others; and (c) constructing and selling boats (according to the appellant — in his spare time, perhaps 2 or 3 boats a year). In the view of counsel for the respondent, Freud (supra) served no purpose for the appellant since in Freud (supra) (a) the taxpayer had invested considerable funds; (b) he was a successful lawyer in his own right; (c) the investors had pursued the project with vigour and dispatch; and (d) finally, they had indeed produced a car or cars.

In my opinion, the above distinctions are not the only ones which can be made between Freud (supra) and the instant case, and perhaps not even the significant ones. While the “prototype” aspect of the boat in question was raised in the notice of appeal, it did not arise at the hearing of this case in the sense it is used in Freud (supra). The unusual and extraordinary circumstances in Freud which permitted the outlays to be written off as claimed were simply that the entire exercise was for the purpose of trade. The cars produces were items of inventory for the sole and singular purpose of being sold themselves — and that would have been the end of Freud’s involvement. The method by which the investors acquired that inventory (in Freud) was unusual — they kept on “buying it” (as construction funds were acquired) and a series of prototypes of the car were made available and ready for sale. I do not attach actual importance to the fact that a car was ultimately completed (in Freud) as opposed to an uncompleted boat in this instance. However, I do point out as quite unique that there was never a thought in the minds of the investors in Freud (supra) to do anything other than to sell the prototypes. Acquiring inventory for the exclusive purpose of selling it is a trading venture in its purest form, as the Minister, the Board and the Courts have been at pains to point out in many cases. That is not the situation in the instant appeals — the appellant was not building a prototype of a new kind of boat for the exclusive purpose of selling the prototype (or prototypes) at a profit. Indeed, it is hardly likely he could have sustained such a position at the hearing since neither the boat nor the boat design were unique or patentable to him.

The evidence and testimony with regard to “building the boat” is not amenable to any interpretation that it was business-related founded upon Freud (supra). There are some indications that it was originally part of a personal interest hobby of the appellant, or that it grew into a project as a result of its start as part of a technical school training project undertaken by the appellant in a role as an instructor. It is not necessary, however, for the board to review and decide upon the possible explanations advanced by the respondent — the appellant simply has not supported his own case. In my view, the appeal of MacEachern (supra) does not provide support for the appellant’s position either. In that matter, the taxpayer was part of an organized program to search for and sell the treasure which had been located. The expenditure of time, effort and dollars was made with the reasonable certainty that the profit came automatically with the discovery. While a hobby it may have been (in the sense that it occupied the spare time of MacEachern), it was a hobby organized along business lines in a very unique and specific field, that case has only limited application to hobby activities in the general sense of the word. In my view, the appellant started to build a boat for the personal pleasure of building and perhaps owning and racing such a racing boat. Certainly he might have entertained the thought that if successful, it has some other possibilities for public distribution — plans, kits, or, in fact, other boats he could build. However, that was not the prime motivation which started him on this venture, and it does not qualify as a business endeavour. That portion of the appeal dealing with expenses claimed for “building the boat” will be dismissed.

The recent Board decision in Libera (supra) was noted earlier. It deals in succinct and precise terms with the question of business expenses and, in my opinion, it is worthy of serious review by any taxpayer considering an appeal in similar circumstances. In Libera, the Board concluded that the appellant had failed to establish as a fact that he had required or used as an office for business purposes, the space designated in his home. Having reached that conclusion, the other expenses claimed, particularly the automobile expenses which were directly contingent upon that fact, were no longer deductible. In the instant case, the appellant is in a much more favourable position, in my opinion. First, the Minister has allowed a “blanket” $150 business expense allowance in each of the years in question and since no explanation of the nature of the $150 was provided, the appellant may conclude with some reason that all or part of that $150 related to “rent”. second, counsel for the Minister in argument has virtually conceded that some consideration for “rent” should be permitted — but only a lesser portion of the residence. As I see it, therefore, the appellant has established his need for and use of a “base of operations” — no matter how limited that base might be. It is not an unusual situation for a sole proprietor to have such a “base of operations” in his own residence, particularly at the commencement of a business venture. (See Keith Fl Jensen v MN Fl, [1977] CTC 2121; 77 DTC 107.) That is entirely different to a claim by a taxpayer for a “second” or “alternative” office (usually also in his own home, and to some degree for his own use and convenience).

The arbitrary allowance process by the Minister and its resultant dilemma for this taxpayer (not knowing which expenses were disallowed) is hardly one which commends itself. In the instant case, the Board will examine two major classes of expenses claimed to which the Minister has taken objection at the hearing — “automobile” and “rent”. Dealing first with the “rent” (which also is related in the financial statements to the telephone, light, heat and water), there is very little in the appellant’s evidence that could lead to a conclusion that he used a full one-third portion of his residence for business purposes, and the Board respectfully declines the Minister’s suggestion to reassess the taxpayer on some other basis (1/5 or 1/6). That is an appropriate task for the professional and competent assessing staff of Revenue Canada. Accordingly, as I see it, I am left with little choice. Having earlier determined that the appellant as a businessman was entitled to a “base of operations”, I must allow the amount claimed entirely. One aspect of its “reasonableness” might be to ask whether or not the appellant could have rented even minimum office and storage space for an average of about $100 per month. I would doubt that he could have done so. The same reasoning should hold true with regard to the automobile expenses. When Mr Cork left his “office” (as I have determined it was), he went to a client’s place of business “just like a lawyer or anyone else”. The appellant did reduce the claim on his tax return by a percentage of the total automobile expenses and automobile depreciation, which is at least some indication that he respected the principle of “reasonableness”. Again, I do not regard it as the Board’s responsibility in the circumstances of this appeal to determine with precision whether or not the balance claimed was all disbursed in the devoted pursuit of profit. That again should be an assessing matter. Substantial evidence had been provided to show that the appellant worked at the locations indicated, and that he disbursed the amounts claimed in travelling to those locations in order to earn the business income which is subject to tax. As for the other sundry items claimed by the taxpayer, in my view they are either reasonable as stated and supported at the hearing, or they should be considered as forming part of the basis for the $150 blanket allowance noted above.

All in all with regard to the “drafting business”, if the Minister has a problem with these appeals, it is in his acceptance of the principle that this appellant was in business, and it was compounded by the blanket $150 expense allowance. It is not for me to suggest that in either procedure the Minister was in error, but I do point out that once embarked upon that course the Minister must permit the taxpayer the maximum latitude available under the Income Tax Act. It is my conclusion that the expenses claimed for the various years in connection with the drafting business are reasonable in the specific circumstances of these appeals and will be allowed.

Decision

The appellant has supported his right to the expenses claimed directly related to his business as a draftsman in the amounts of $2,650.81, $2,953.13 and $6,255.74 for the taxation years 1974, 1975 and 1976 respectively, and that part of his appeals is to be allowed. To the degree that these added deductions will affect the “general averaging”, his appeal for the year 1977 is also allowed. In all other respects the appeals are dismissed. The entire matter is referred back to the Minister for reconsideration and reassessment in a manner not inconsistent with the above reasons.

Appeal allowed in part.