Erik Olesen v. Her Majesty the Queen, [1996] 3 CTC 2507 (Informal Procedure)

Taylor J.T.C.C.: — This is the case of Erik Olesen, with respect to the years 1992 and 1993, wherein the Minister disallowed the losses claimed of $19,496 and $9,049 respectively under the provisions of the Income Tax Act (the “Act”).

Mr. Olesen and his accountant, Mr. Crofton indicated the background of this operation. The expenses charged were in connection with a product that Mr. Olesen has been trying to develop and market. It would appear that during the early years, perhaps 1987 and 1988, there were certain writeoffs based on that view (development period). Even assuming that to be the case, I do not see how it has a direct bearing on these appeals.

The losses claimed in the five year period, from 1987 through 1991 alone were $63,452, and these were allowed as deductions from other income by the Respondent, presumably on the basis that there was evidence to support “a reasonable expectation of profit”. Those years are not before the Court, and I need express no views on that decision by Revenue Canada, although I agree it would be difficult to see any such support for it in the information provided at the trial alone. During the process of cross-examination of Mr. Olesen, by the Minister’s Counsel there were quite clear indications that the loss for the year 1993, could be considerably greater, perhaps closer to that for 1992. The losses have continued for the two years in issue and even beyond that point in time. There is therefore, no reason for the Court to conclude that the loss period is in fact over. That can be regarded as fairly substantive financial support for this venture by the taxpayers of Canada through the Act. This is not a situation in which it can be said that there has been no opportunity provided to show that the idea or the course of action of the Appellant should produce a profit. Further this is not a situation which is entirely devoid of personal or living expenses according to the circumstances highlighted by Counsel for the Respondent. The operation here, as important to Mr. Olesen as it is, and as dedicated to it’s fulfilment and success as he clearly appears to be, is not a business as that must be defined under the Act.

Mr. Crofton referred to a recent case, Tonn v. R., (sub nom. Tonn v. Canada) [1996] 1 C.T.C. 205, 96 D.T.C. 6001 (F.C.A.). It does broaden out quite considerably the direction that this Court must take in using the standards set by the Moldowan case. Moldowan v. R., (sub nom. Moldowan v. Minister of National Revenue) [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213. I have taken Tonn (supra) into account in this matter and I do not see that even under that broader vision, it can be ascertained that this matter should be treated differently than the way it has been assessed by the Minister of National Revenue*.

* See Judges’s Note Attached.

Judges’ Note

Reference could be made to the recent unreported case from this Court, Joseph v. R. (March 19, 1996), Doc. 95-755 (IT)I) (T.C.C.), one of the closing comments from which reads as follows:

“Second guessing” is not a method of assessing that has appeared to be at all pervasive or intrusive in the practices of Revenue Canada officials, at least in my experience. On those rare occasions when it has been observed, the case law shows it has been dealt with vigorously in the judicial process. The personal agenda, or the social and psychological urges which would warrant this taxpayer to commence and to pursue a course so evidently unprofitable from a simply economic perspective, might well be an area not only beyond the responsibility of the Respondent to critically examine, but perhaps even beyond the right or capability so to do. The difficulties encountered did not appear to be of an unknown or unexpected nature, and it appears that the mortgage interest alone exceeded rental revenue in this matter, for the three last years. Counsel for the Respondent made no concession or distinction, with respect to the initial year 1989, to which I would be required to give separate consideration, even within the broad context of the Tonn (supra) judgement.

Two statements from Mrs. Joseph’s Notice of Appeal (supra) are of specific interest:

5. When the Business makes money Revenue Canada will claim its share as it always does.

6. I deem it unfair that which [sic] I make a loss, Revenue Canada refuses to accept my business as valid and bona fide.

Whether it was in her mind I do not know, but it raises the intriguing prospect of using the provisions of section 111 of the Act, part of which reads:

Losses deductible

(1) For the purpose of computing the taxable income of a taxpayer for a

taxation year there may be deducted such portion as he may claim of -

(a) non-capital losses - his non-capital losses for the 7 taxation years immediately preceding and the 3 taxation years immediately following the year;

I can appreciate that in her understandable zeal to utilize to the fullest extent the more immediate deduction provisions in the Act, this taxpayer might have tended to reject consideration of the above provision. Whether she could claim such “loss” deductions (even if initially denied by Revenue Canada) against profits actually realized later on, which profits would then help to prove her claim of the viability of the questioned venture would require examination. Such a practice might even lend itself to an added incentive for earlier profit production from such a venture, or conversely acceptance of the reality that the financial results demonstrated. A small ultimate profit in one year, still might not be adequate to overturn years of losses - to make a “source of income’’ - but I need make no determination of that point at this time. It might also be argued that the provisions of Section III above were inserted in the Act for the express purpose of providing a reliable and useful route for recording, even possibly reporting, but not immediately deducting, early or “start-up” losses incurred, as opposed to the more contentious “front-end loading” avenue frequently pursued.

The appeals for the years 1992 and 1993 are dismissed.

Appeal dismissed.