Major v. R., [1997] 1 CTC 2511 (Informal Procedure)

Garon J.T.C.C.: - This is an appeal from an assessment by the Minister of National Revenue (the “Minister”) for the 1992 taxation year. By that assessment, the Minister disallowed a deduction of $16,164 claimed by the appellant as a business loss on the ground that the appellant did not have a reasonable expectation of profit in continuing his activities relating to the rental of old cars for occasions such as weddings.

The appellant and his accountant testified at the hearing. No witness was produced for the respondent.

The appellant admitted the allegations in subparagraphs (a), (b) and (c) of paragraph 17 of the Reply to the Notice of Appeal. Those subparagraphs read as follows:

a. the appellant allegedly began his limousine rental business (his “business”) by purchasing a first car in 1982, three others in 1986 and another in 1987;

b. in the spring of 1988, the appellant allegedly began operating his business by renting his limousines for ceremonies, 90 per cent of which, according to the appellant, were weddings;

c. since 1988, the appellant has always reported large losses from his business as per the following revenues and expenditures:

TAXATION GROSS		NET
YEAR	REVENUE	EXPENSES	LOSS
1988	$12,800	$41,349	$28,549
1989	$13,600	$32,889	$19,289
1990	$10,700	$26,364	$15,664
1991	$10,700	$16,594	$ 5,894
1992	$ 9,888	$26,052	$16,164

[Translation.]

With respect to the losses incurred by the appellant during the years 1988 to 1992, one should note the allegation appearing at paragraph 3 of the Notice of Appeal under the heading “Reasons for My Appeal”. That paragraph reads as follows:

3. If the capital cost allowance is excluded from the operating expenses for the 1988 to 1992 taxation years, you will note that the operating losses are not SO great:

	1988	1989	1990	1991	1992
Loss	$28,549	$19,289	$15,664	$5,894	$16,172
claimed
Capital cost
allowance	28,200	19.740	13,818	4,048	13,506
(Loss) or	($ 349) $	451	($1,846) ($1,846) ($2,666)
Profit

[Translation.]

A statement of revenue and expenditure for the year ended December 31, 1992 is reproduced below:

Rental revenue $ 9,888

Less:

Operating expenses:

Commercial registration $ 492 Gasoline, oil and lubricants $ 3,030 Maintenance and repairs $ 1,417 Insurance $ 3,590 Drivers’ salaries $ 1,617 Garage rent $ 2,400 Depreciation - automobile 30% $13,506 $26,052 $26,052

Net loss for the year ended December 31, 1992($16,172)}

The appellant, who carried on the activities described above in Montréal, has since 1982 been a member of a Montréal association of old and classic car owners known as VACM Inc. The appellant spent many hours each week on all types of work intended to restore the cars in question to good running order. As part of his activities, the appellant had to carry out very substantial repair and paint removal work during the years prior to that in question. This major work was completed some time before the year in issue. In 1992 in particular, and during subsequent years, the work that was done on the five cars that constitute the business’s fleet was, except in a few instances, in the nature of maintenance work. Since 1992 in particular, the appellant had not devoted as much time to pursuing his activities relating to the rental of the cars in question. He stated, however, that he had worked an average of at least some 20 hours a week. He had further retained the services of three employees as drivers of those cars when they were rented.

The appellant stated that, although he was not a mechanic, he had sound knowledge in the field and certain skills in the kind of work to be done on the old cars. Prior to an accident that he suffered in June 1990, he had been an employee in the plumbing and heating industry for a number of years. He retired a year and a half ago.

The appellant also stated that, from 1982 to 1992, he had invested about $110,000 in pursuing that occupation. On this point, the capital cost of the five cars alone was fixed at $94,000.

The appellant stated that he believed his car rental activities could be profitable now or in the near future given that the major work on those cars had already been done. The expenses that he had incurred since 1992 and that he would have to incur in future would mainly be for maintenance work. The appellant also described certain measures that he had taken in order to reduce the expenses relating to his activities. He said he thought he had enough cars for the operation in question to be profitable. He therefore did not have to make new car acquisitions. The appellant’s spouse occasionally handled the rental of those cars; her collaboration was on a volunteer basis.

A statement of revenue and expenditure was filed for the year ended December 31, 1994. The statement showed a profit of $946 for the year in question. It should be noted that no deduction was made for capital cost allowance. This statement appears below:

Revenue from limousine rentals $5,630

Less:

Operating expenses:

Commercial registration $ 256 Gasoline, oil and lubricants $ 300 Maintenance and repairs $ 145 Various office expenses $ 127 Professional fees $ 125 Insurance $2,251 Drivers’ salaries $ 840 Garage rentals $ 640 $4,684

Net profit for the year ended December 31, 1994 $ 946

Having regard to the facts of this case, I must determine whether in 1992 the appellant had a reasonable expectation of profit in pursuing his activities relating to the rental of the old cars here in question.

The appellant appeared to me to be an entirely credible and honest witness. I believe he was realistic in stating that his activities could be profitable in the near future. The weight of the evidence seems to me to go in this direction. It is certainly not unreasonable to come to this conclusion if one takes into account the fact that the major expenses were things of the past and that the expense in respect of capital cost allowance could be allocated over a number of years. The business that here concerns us is clearly quite modest, but in my view it is indeed a business.

In the standard decision by the Supreme Court of Canada in Moldoxvan v. R., (sub nom. Moldowan v. Minister of National Revenue,! [1] it is indicated that capital cost allowance in particular must be taken into account in assessing all the relevant facts in order to determine whether a taxpayer has a reasonable expectation of profit. This conclusion is logical since the depreciation of an asset, its loss of value regardless of the cause, over a given year constitutes an expense chargeable to the appropriate fiscal year.

Paragraph 1100(l)(a) of the Income Tax Regulations permits a taxpayer, in computing his income for each taxation year, to deduct in respect of a number of classes of property a percentage not exceeding the rate provided in respect of the relevant class of the undepreciated capital cost to him of the property of the class at the end of the taxation year. As the property in the instant case was old cars for which age constituted a not negligible element of value, it would seem to me at first glance common- sensical if the appellant, instead of claiming the maximum amount allowed by the Income Tax Regulations, deducted in this respect a much lower percentage of the undepreciated capital cost of the property of the class. Although I do not have to rule categorically on this specific issue, the appellant could be justified in economic terms in claiming only a percentage of, for example, five to 10 per cent of the undepreciated capital cost of the class of property during the first years in which he made a deduction in respect of capital cost allowance. In making this last remark, I take into account the fact that, in respect of a number of classes of property, including automobiles, the depreciation method provided by section 1100 of the Income Tax Regulations is the diminishing balance method. As a result of this method, the depreciation that could be taken by a taxpayer after a certain number of years could represent a quite small amount relative to the capital cost of all the property of the class if the taxpayer chose, as the regulations permit, to take the maximum deductions authorized thereby during the first years in which that property is held.

It is therefore my view that the expenses made or incurred by the appellant in 1992 do not constitute personal or living expenses, but rather expenses made in order to earn income from a business.

For these reasons, the appeal is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellant is entitled, in computing his income, to the deduction of the $16,164 loss incurred in 1992.

The appellant is also entitled to costs in respect of this appeal.

Appeal allowed.