Brulé J.T.C.C.: This is an appeal resulting from reassessments of the appellant’s 1992 and 1993 taxation years in which certain business losses were not allowed as personal deductions to the appellant.
Facts
The appellant is a psychiatrist who was the proprietor of Business Development Company (“BDC”), an unincorporated entity. It was the intention of the appellant to earn income on import/export business. The appellant was successful in his medical practice and wished to embark on other profitable activities. He met and engaged as his manager a Mr. I. Dowla who was hired to direct the business operation.
At first a scheme to sell T-shirts was embarked upon but this was abandoned. Next an attempt was made to sell personal lockets but this did not materialize.
The appellant gave Dowla sums of money which were never recorded. For many of the payments there were no receipts. It was admitted by Dowla that BDC was not active and there were no sales either of T-shirts or lockets.
BDC sustained losses of $52,513.00 in 1992 and $39,303.00 in 1993. These funds were advanced by the appellant from his medical practice and were the subject of the reassessments of these appeals.
Appellant’s Position
In argument counsel for the appellant admitted that the appellant had gone into business in an amateur way, although enthusiastic about making a profit. While there was no success the appellant certainly tried, even though he took no active part, other than meetings with Dowla.
It was suggested that the appellant be given the benefit of any doubt regarding the reasonable expectation of profit and counsel referred the Court to the case of Tonn v. R. (sub nom. Tonn v. Canada), [1996] 1 C.T.C. 205, 96 D.T.C. 6001 (F.C.A.).
Respondent's Position
Counsel pointed out several deficiencies in the appellant’s endeavours. No revenue was earned whereas over $92,000.00 in expenses were claimed. There was no business plan; there was no proper recording of the activity. Cheques by the appellant went to different places, often with no receipts.
Dowla’s family were quite involved with the activity including the search for T-shirts off-shore and the lockets produced by his family. While there was some inventory it had little value.
While the Tonn case, supra, explained “reasonable expectation of profit” this case had little in common with the facts in Tonn and this latter case while of merit could not be used as a comparable to gain a favourable judgment.
Counsel preferred that the Court follow the case of Engler v. R. (sub nom. Engler v. Canada), [1994] 2 C.T.C. 64, 94 D.T.C. 6280 (F.C.T.D.).
Analysis
It is important to distinguish the Tonn case (supra) from the one before this Court. In Tonn there was an existing business but not so here. Tonn had income but no such income was derived in the present case. There must be income, or the possibility of income to come, before there can be a reasonable expectation of profit. No such situation existed here, only a hope with no plan. In Tonn the Court held there was a plan, albeit, a rudimentary one, which was attempted to be followed.
While the Tonn case goes into great detail including a discussion of the legislature provisions for expense deductions including subsection 9(1), paragraphs 18(1 )(a) and 18(1 )(b) all of the Income Tax Act as well as the test found in Moldowan v. R. (sub nom. Moldowan v. Minister of National Revenue) (sub nom. Moldowan v. The Queen), [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213. I do not believe it is necessary to go into similar detail here.
In Tonn the Federal Court of Appeal said, “The primary use of Moldowan as an objective test, therefore, is the prevention of inappropriate reductions in tax; it is not intended as a vehicle for the wholesale judicial second-guessing of business judgments.”
The Federal Court of Appeal, Linden J.A., referred to the Engler case
(supra) and had this to say:
In another case, Engler v. Q., a taxpayer attempted to deduct losses from a small business he formed to buy and sell various gift items such as brassware, watches, rings and household gadgets. The profits intended from this business were to supplement the taxpayer’s employment income. Though no personal element was apparent in how the taxpayer ran the business, and though the type of business suggested a bona fide commercial operation, the losses arising from it were held to be non-deductible because the venture lacked a reasonable expectation of profit. Even though the operation could not otherwise be impugned, the rather large losses claimed were too suspicious to be overlooked, thus suggesting that a non- commercial intention lay at their source. In deciding the matter, Joyal, J. stated:
On the evidence, it might be said that the plaintiff originally brought the whole controversy upon himself by claiming expenses which could not by any stretch of the imagination be justified. In the face of this obvious disproportion between the resulting losses and the volume of business generated, or the capital committed, or the time and energy devoted to it, it was an easy slide from a determination of the unreasonableness of the expenses to an assumption that the venture, in any event, did not have a reasonable expectation of profit.
I also find the following words from earlier in the judgment instructive:
It is only when the taxpayer has other sources of income against which any such losses are claimed that Revenue Canada’s antennae start sending out signals which might become a source of concern to the taxpayer. Depending on the circumstances in each case, Revenue Canada will assume that the taxpayer is engaged in a business which objectively has no reasonable expectation of profit. The inference will be drawn that the taxpayer is merely engaged in a sport, hobby or some other self-satisfying endeavour, and if his losses are charged to his other sources of income, he is effectively reducing his tax exposure.
The present case is similar in that Dr. Griffin’s activity lacked a reasonable expectation of profit. The expenses were inordinately high and no income was received. It seemed like a great way to write off expenses and the appellant was naive enough to go along with the suggestions of Dowla. The result is that these appeals are dismissed with costs.
Appeal was dismissed.
Email this Content