Cunningham v. R., [1998] 1 CTC 3125

Taylor T.C.J.:

This is an appeal heard in Toronto, Ontario on April 7, 1997 and August 8, 1997 against an assessment under the Income Tax Act (the “Act”). The Notice of Appeal read in part as follows:

The ‘Notification of Confirmation by the Minister’ dated 22 March 1996, states that my business losses of $19,428.00 in 1993 were being disallowed because there was no business being carried on by me that year. The losses being created by business expenses, as laid out under Paragraph 18(1 )(a) of the Income Tax Act.

I provided evidence to the contrary and can show the court that I met the criteria required under the Income Tax Act (Commencement of Business Operations). I hope to prove that the officers of the Appeals Division erred in their assessment of my case.

The Reply to Notice of Appeal provided details, some of which are not relevant to this appeal, since only the year 1993 is now at issue. Nevertheless, the background is helpful, and it is referenced:

3. In computing income for the 1993 taxation year, the Appellant deducted a business loss in the amount of $19,428.18 in respect of a purported Fast Food Franchise.

4. On May 15, 1994, the Appellant filed a T1 Adjustment Request reporting a business loss in the amount of $22,938.53 in respect of a purported Fast Food Franchise.

5. In assessing the Appellant for the 1993 taxation year, Notice of Assessment thereof mailed June 27, 1994, the Minister allowed the business loss of $19,428.00.

6. By a letter dated February 20, 1995, the Minister denied the Appellant’s request for a business loss of $22,938.53 for the 1992 taxation year.

7. In reassessing the Appellant for the 1993 taxation year, Notice of Reassessment thereof mailed May 11, 1995, the Minister disallowed the business loss of $19,428.00 (the “Amount”).

8. In so reassessing the Appellant, the Minister made the following assumptions of fact:

(a) the facts hereinbefore admitted;

(b) in the 1992 and 1993 taxation years, the Appellant reported business losses in the amounts of $22,938.53 and $19,428.18, respectively, in respect of a purported Fast Food Franchise, as follows:

	1993	1992
	$ Nil	$ Nil
Expenses:
Accounting & legal fees	$ 9,504.39	$ 1,065.10

Automobile expenses	2,408.91	7,946.71
Delivery, freight	3,293.24
Office expenses	435.87	1,437.89
Travelling expenses	3,785.77	12,488.83
Total expenses	$19,428.18	$22,938.53
Business loss	$19,428.18	$22,938.53

(c) at all relevant times, the Appellant’s parents resided in Glasgow, Scotland;

(d) in December 1989, the Appellant applied for a possible franchise with McDonald’s Restaurant Limited (“McDonald’s”) in Glasgow, Scotland:

(e) in February, 1991, the Appellant was accepted as a registered applicant for a McDonald’s franchise;

(f) on January 8, 1992, the Appellant was informed that he had completed the operational training and was eligible to be offered a McDonald’s restaurant;

(g) on May 19, 1993, the Appellant was informed that he was a proposed franchises for a McDonald’s restaurant located at Ayr Racecourse, Whitletts Road, Ayr, Scotland;

(h) on July 13, 1993, the Appellant was formally notified that he was removed from the McDonald’s list of registered applicants;

(i) the Appellant had not acquired a McDonald’s franchise;

(j) the Appellant had never commenced to operate a McDonald’s restaurant;

(k) in the 1993 taxation year, the Appellant incurred accounting and legal fees in the amounts of $3,656.25 and $1,250.00 in Sterling Pounds (the “Accounting and Legal Fees”) in attempting to acquired a McDonald’s franchise;

(l) the Accounting and Legal Fees were payments on account of capital;

(m) in the 1993 taxation year, the Appellant paid air fares for travelling between Toronto, Ontario and Glasgow, Scotland, as follows:

February 1993 Round Trip Canadian $578.00

April 1993 From Toronto Canadian $317.20

July 1993 From London Sterling $189.50

(n) the delivery fees and freight reported by the Appellant in the 1993 taxation year were incurred for the shipping of his personal effects and personal motor vehicle from Toronto, Ontario to Glasgow, Scotland in April 1993 and returning them to Toronto in September, 1993;

(o) in the 1993 taxation year, the Appellant reported car rental expenses incurred in Glasgow, various gas and parking expenses and meals expenses incurred in Ontario and Scotland as automobile and travelling expenses, respectively. Some of the gas expenses reported by the Appellant were duplicated;

(p) in the 1993 taxation year, the Appellant reported some of the telephone charges of his parent’s residence as office expenses;

(q) the expenses claimed by the Appellant in the 1993 taxation year were not made or incurred by the Appellant for the purpose of gaining or producing income from a property or business but were personal or living expenses of the Appellant.

B. Issues to be Decided

9. The issue is whether the Appellant is entitled to deduct the Amount as a business loss in the 1993 taxation year.

C. Statutory Provisions, Grounds Relied on and Relief Sought

10. He relies on section 3, subsections 9(2) and 248(1), and paragraphs 4(1 )(a), 18( l)(a), 18(1 )(b) and 18( 1 )(h) of the Income Tax Act (the “Act”) as amended for the 1993 taxation year.

11. He submits that the Appellant was not entitled to deduct the Amount as a business loss in the 1993 taxation year in accordance with subsection 9(2) of the Act as the Appellant had not commenced to carry on a business in that year.

12. He submits that the expenses claimed by the Appellant in the 1993 taxation year were not made or incurred by the Appellant for the purpose of gaining or producing income from a property or business within the meaning of paragraph 18( 1 )(a) of the Act but were personal or living expenses of the Appellant within the meaning of paragraph 18(1 )(h) of the Act.

13. He further submits that if it is determined by this Honourable Court that any part of the Amount was paid or incurred for the purpose of attempting to acquire a McDonald’s franchise, it is a payment on account of capital within the meaning of paragraph 18( 1 )(b) of the Act, and accordingly, the Appellant is not entitled to deduct any amount as a business loss in the 1993 taxation year in accordance with subsection 9(2) of the Act.

14. In the alternative, he submits that the deduction of the disallowed expenses is prohibited by section 67 of the Act, as they were not reasonable in the circumstances.

As part of his presentation to Court, Mr. Cunningham filed a “Chronology of Events” which is reproduced:

Chronology of Events

Dec. 1989

Interview with Mr. Sid Nicholson, Vice President, chief Personnel Officer in London,

May 1990

On-the-job evaluation, Trongate Store, Glasgow.

Aug. 1990

Interview with Mssrs. T. Haynes, K. Haigh and P. Cobden, Executive Vice Presidents, Chief Financial Officer, Chief Operations Officer and Chief Real Estate Officer, respectively.

Sept. 1990

Interview with Mr. Paul Preston, C.E.O. and President of McDonald’s U.K.

Oct. 1990

Commenced part-time training in Toronto, at University Ave. and Dundas St. store.

Apr. 1991

Returned to Glasgow to start full-time training.

Jan. 1992

Completed formal training and returned to Toronto as no new sites were available. Continued working part-time at McDonald’s.

Mar. 1992

Regional Licensee Meeting, Inverness, U.K.

May 1992

Review of Coatbridge site with Mr. Peter Richards, Regional Vice President. Regional Licensee Meeting in Bradford, U.K.

Oct. 1992

Meeting in Manchester with Peter Richards to consider existing sites.

Dec. 1992

Letter from Mr. Vic Streeter, Assistant Vice President, Licensing, suggesting that I return to U.K. for a May opening of the Ayr site.

Feb. 1993

Meetings in Glasgow with Mr. D. Tainsh, Accountant and various banks to discuss financing.

Mar. 1993

Letter from Peter Richards advising me of Ayr opening in 1993.

Apr. 1993

Moved to Scotland to commence preparations for opening.

19 May ’93

Notification of Franchise Agreement preparation by Legal Dept.

20 May ’93

Letter from Peter Richards advising me of problem with Ayr/and that new sites in Edinburgh were not being franchised.

28 May ’93

Meeting in Manchester with Peter Richards.

16 Jun. ’93

P. Richards offered me Irvine location.

8 Jul. ’93

Meeting in London with Messrs. T. Haynes (C.F.O.), A. Taylor, Senior V.P. Operations and P. Richards to discuss the Irvine site and rental options, since the elimination of the Rent Chart given to me in 1990 by Terrence Haynes.

13 Jul. ’93

Letter from A. Taylor informing me of my removal from the program.

14 Jul. ’93

Letter from Bank of Ireland with finance approval for Irvine site.

26 Jul. ’93

Letter from A. Taylor in reply to my phone call to Sid Nicholson

8 Sep. 93

Last meeting in Glasgow with A. Taylor to try to resolve the situation.

15 Sep. 93

Returned to Toronto.

Mr. Cunningham filled copies of letters and other documents as an effort to support not only the above chronology but the entire venture in the manner he proposed.

Argument

Mr. Cunningham, in reviewing the “Chronology of Events”, and the supporting information, proposed that taken together the pattern which emerged quite clearly was that a business had commenced, and the expenses related thereto should be allowed. He recognised that there might be some difference of opinion with respect to certain items being “personal” or perhaps “capital”, but the fundamental premise remained intact. Essentially, however, his contention for deduction was based on jurisprudence particularly that of Gartry v. R. Tax Court of Canada [1994] 2 C.T.C. 2021 (T.C.C.), in which the appeal was allowed, and he quoted therefrom specifically from the headnote:

There was no merit in the Crown’s argument that the business may not have commenced because where a taxpayer has taken significant and essential steps that are necessary to the carrying on of the business it is fair to conclude that the business has started.

The Appellant’s position is best outlined in the following comments from his argument:

...I would have opened as soon as the Irvine site was completed. My intention was, I had done all the preparatory work leading up to the takeover or the signing of the franchise that was required by McDonald’s and their franchisee training program, so it was my intention, in fact, to continue and then to operate a viable business operation.

...My business plan clearly indicates the fact that the Bank of Ireland were willing to lend me such a sum of money, that I had obviously given them indication that I had enough in capital to invest to operate a viable business concern.

...I had done all the ground work and had forecasted and projected cash flow figures for the bank.

...What I was doing was to eventually show reasonable expectation of earning a business profit, a business operation with profit in mind.

...I move to the Gartry case and I compare my situation with the Gartry case.

...I had, though, set aside 500,000 approximately dollars plus for the McDonald’s operation, for the franchise.

In my case it was lost before I could own it due to McDonald’s removing me from the program while negotiating rent.

Since I never got to purchase my asset, then my deductions should be allowed, especially with regard to the legal and accounting costs.

… They’re viewing my situation as I never opened the doors, therefore, I never operated the business, and I feel quite clearly and the precedent has been set that that is not a very logical or fair or businesslike way of looking at the tax situation.

...In my case it was clear that my intention from the outset was to purchase a McDonald’s franchise, and I feel I have presented the Court with enough evidence to prove my intentions of purchasing and operating a franchise with the reasonable expectation of making a profit. As I stated, I had given up my job to run the business in the years indicated.

...but I feel that, from a legal standpoint as I tried to state earlier, that we had entered into an informal agreement, and I feel that in all fairness and for commercial purposes, that should be treated as sort of an initial type of contract situation. ...not being that I was going to get a franchise but we had entered into some sort of business arrangement, that they would train me, and assuming that I’d met the training standards, that they would then offer me a franchise.

Counsel for the Respondent put forward a different view of the situation, and proposed a determination in line with other case law, some of which I note here, together with specifically relevant comments from the learned Judges dismissing the appeals:

Craddock v. Minister of National Revenue (1986), 86 D.T.C. 1014 (T.C.C.), at page 1016:

What the taxpayer is really saying is that his business operations cannot start until such time as there is sufficient capital available to support the business. In 1980 and 1981 Messrs. Giffen and Craddock were working to get the property to a condition which would support what. they wanted to do with it. But they were not yet carrying on a business.

Bancroft v. Minister of National Revenue (1989), 89 D.T.C. 153 (T.C.C.), at page 155:

The Appellant was in the process of creating a business structure. He never finished creating it. He never commenced his proposed business of a year-round country retreat. I am of the view that the evidence disclosed that the Appellant never carried on a business nor did he commence a business.

Much was said at the hearing about whether the undertaking had a reasonable expectation of profit. I find that I do not have to decide on that in view of my finding that the business itself never commenced.

Hilts v. Minister of National Revenue (1991), 91 D.T.C. 633 (T.C.C.), at page 636:

It is apparent that what the Appellants were doing in the years under review here were expending funds to improve the capital assets of the property so that a business might be carried on in the future when the production aspect of their enterprise commenced, but they were not during those years carrying on the business of farming.

Some of Counsel’s critical comments were:

… What we have essentially is a series, of course, of letters going from McDonald’s U.K. to either Mr. Cunningham or to Mr. Cunningham’s solicitors in the U.K. What this correspondence indicates is that at the end of 1990 or in October of 1990 rather the Appellant was accepted as a franchisee by McDonald’s U.K. That didn’t mean, though, at the time that McDonald’s U.K. was obliged to offer the franchise or a franchise to the Appellant, and that didn’t mean either that the Appellant was obliged to become a franchisee.

any franchise agreement would be subject to contract, that it would be conditional, that either the Appellant or McDonald’s could, I was going to say break the contract, but that’s not the case, terminate the relationship between each other.

..No one disputes that he had training. What one disputes is whether he was actually involved in business.

… The Appellant had never obtained any financing for the Ayr site.

... he Appellant was rejected as an applicant for the McDonald’s franchise on July 13th of 1993. We have a letter in Exhibit A-5 that indicates that. Financing for the Irvine site was not obtained from the Bank of Ireland until July 14th, at the time when there could be no possible business because McDonald’s had rejected Mr. Cunningham as a potential franchisee.

...even in June and July of 1993 that there was no determination yet of the decor, there was no equipment purchased and there also was no staff hired. I referred to the business plan in cross-examining Mr. Cunningham which indicates that staff would not be hired, generally speaking, until one month prior to the opening of the restaurant.

In reference specifically to Gartry (supra) he recognized that the circumstances in this case were considerably short of those demonstrated in that case:

...Not only did he know what he was going to do, not only did he have employees, not only did he have an asset. Okay, he hadn’t acquired as owner yet, but essentially that was the last step. All he had to do was get that boat and then he could have been in business because he had his customers, he knew what he was going to do. By law, I don’t mean by income tax law, but by regulations he was entitled to or able to enter into that business. He had his business structure, it was set up. (underlining mine)

The dilemma facing any proposition that a business is in operation based solely on the business structure was highlighted by Counsel.

Since there was little dispute about the basic facts this judgment in the end must rest on the law, and to some extent on the interpretation placed thereon in the jurisprudence. Accordingly, I have reviewed additional examples of case law which I considered of some relevance. Certainly they do not cover all the points which might have merit in this situation but they are illuminating.

Firestone v. R., Federal Court of Appeal (1987), 87 D.T.C. 5237 (Fed. C.A.), at pages 5244 and 5245 allowing the appeal:

Nor is the appellant’s case weakened by the fact that there is neither immediate income nor an immediate source of income in his business.

Again it seems to me, the rule is the same: a realistic, common sense, business approach will not be defeated by narrow technicalities, unless they are clearly imposed by the law.

Ellis v. R (1994), 94 D.T.C. 1731 (T.C.C.), at page 1735 in allowing the appeal:

I am satisfied on all of the evidence that the appellant was in business by November 30, 1987. She had registered her business name, opened a bank account, borrowed money for construction, obtained building permits, hired contractors and undertook a process of manufacturing, collecting and sorting items for sale in her retail premises. She and Mr. Ellis worked on preparing the interior of the premises and installing the necessary fixtures and equipment. The appellant had acquired various items for sale over the years and was continually preparing for the day upon which the doors would be open to the public. Having regard to all of the evidence and in accordance with the jurisprudence (See The Minister of National Revenue v. M.P. Drilling Ltd (1976), 76 D.T.C. 6028), I find the appellant was in business as of November 30 1987. On that basis the appeal is allowed and the matter is referred back to the Minister for reconsideration and reassessment as it affects calculations of CCA or any other matters dependent on the starting date of the business.

And in dismissing the appeals:

Anderson v. Minister of National Revenue (1992), 92 D.T.C. 1778 (T.C.C.), at pages 1780 - 1781:

...Mrs. Anderson has not established that she carried on any business or that she was engaged in any business.

… The Appellant argues that M.N.R. v. M.P. Drilling Ltd., 76 DTC 6028 (F.C.A.) stands for the proposition that there need not be revenue before proper expenses may be chargeable against income whether or not any income resulted from such expenditures. In M.P. Drilling, the Minister attempted to categorize the disputed expenses as capital while the Court held that if they were expenses incurred for the purpose of earning income from a business and in themselves were not of a capital nature, they cannot be rendered non-deductible by virtue of paragraph 12(1 )(a) [now 18(l)(a)]. While this is true, the reverse is also true. If the ex- penses were made on capital account, they cannot be made deductible whether revenues were present or not.

She was thus expending monies for the creation of a structure for earning profit. The monies were used for the purpose of acquiring an income stream or source, which is a capital outlay.

Duthie Estate v. Minister of National Revenue (1992), 92 D.T.C. 1043 (T.C.C.), at page 1050:

...I am therefore of the view that the deduction of these development expenses is not prohibited by paragraph 18(1 )(a) of the Act.

I have, however, concluded that these expenses are on account of capital and are not deductible on account of paragraph 18(1)(b) of the Income Tax Act. In effect, these expenditures were made for the purpose of creating a business entity, the construction of a complex, with the required amenities, that was to contain a number of units or apartments to be offered for sale.

F earn v. R (1995), 95 D.T.C. 5052 (Fed. T.D.), at page 5056:

Notwithstanding the subjective element present in any tax case of this nature, or of the earnest plea of plaintiff’s counsel to bring persuation into it, 1 am not satisfied that the Crown’s assumptions have been rebutted. The realities, in my respectful view, do not meet the test of “reasonable expectation of profit” or, for that matter show that the disallowed expenses were related to a business. The activities of the plaintiff consisted of buying a property and of building a cottage, a jetty and a windmill on it. The business activity did not go any further than that.

Chambers v. R. (June 16, 1997), Doc. A-725-95 (Fed. C.A.), dated June 16, 1997:

After analyzing the relevant authorities, including the decision of this Court in Maloney v. The Queen (1989), 89 D.T.C. 5099, the Tax Court Judge found that the appellant had not carried on a business in the taxation year 1986, and that consequently he could not claim the sum of $25,100 as a business loss in that year. He therefore dismissed the appellant’s appeal.

We are of the view that the Tax Court Judge was right both in principle and authority in reaching the conclusion that he did. Accordingly, we will dismiss the appeal with costs.

Samson et Frères Ltée c. R. (1995), 96 D.T.C. 1559 (T.C.C.) from the English translation:

...1 find that all the steps taken to purchase lands, buildings and equipment in various locations were merely preliminary and intended to bring together the basic elements or structure of the new business, which structure moreover was never concretely put into place and always remained at the planning stage, the materialization of that plan being con- tingent upon obtaining outside financing. To the extent that the very structure of the business the appellant wished to operate was never put into place, it is hard to see how the expenses relating to preliminary efforts to establish a business that does not exist which efforts did not go beyond the planning stage can be claimed to be deductible.

(And in referring to the Federal Court of Appeal case in Minister of National Revenue v. M.P. Drilling Ltd. (1976), 76 D.T.C. 6028 (Fed. C.A.), the Judge of this Court in Samson (supra) noted:

It seems clear to me from that decision that, for a business to exist and to have commenced, one must have gone beyond the stage of merely intending to commence it.

Goren v. R. (May 7, 1997), Doc. 93-1486(IT)G (T.C.C.):

...where it was held that a business had been commenced before the operation started to generate revenues, but in such cases the activities of the taxpayer including the expenditures of moneys, the acquisition of assets and the creation of a business structure had advanced to the point at which, as a matter of commercial reality, it could be said that it had commenced the process of operating a profit making entity.

None of these factors existed here on the relevant date of February 26, 1986.

Urbandale Realty Corp. v. Minister of National Revenue (May 23, 1997), Doc. T-533-93 (Fed. T.D.):

If the expense in question is of a capital nature, it does not become deductible from revenue because of further limitations stipulated under subsection 18(2).

...Consequently, the interpretation bulletins issued by the Department of National Revenue are of no assistance to the plaintiff in this matter,

Heinze v. Minister of National Revenue (April 11, 1997), Doc. T- 803-85, T-804-85 (Fed. T.D.):

In Daley v. Minister of National Revenue 50 D.T.C. 877 (Exch. Ct.) Thorson P. states at p. 880:

It seems clear that a disbursement or expense such as this which is laid out or expended not in the course of the operations, transactions or services from which the taxpayer earned his income but a time anterior to their commencement and by way of qualification or preparation for them is not the kind of disbursement or expense that could be properly deducted in the ascertainment or estimation of his “annual net profit or gain”.

In McLachlen v. Minister of National Revenue (1973), 74 D.T.C. 1035, (Tax Review Board) Lucien Cardin, Assistant Chairman stated at page 1037:

However, the important point to consider in this appeal is the period of time at which the preparatory and planning stage of the appellant’s project terminated and the actual farming operations began. I do not believe that farming operations can be considered as having started at the time the idea or the intention of farming was conceived, not at any stage prior to the actual operations of the farm.

I think these precedents are applicable in the present case. The plaintiffs were not in the farming business in the relevant years.

Analysis

It is probably appropriate that the final reference above cites a comment from the distinguished former Assistant Chairman (later Chairman) of the Tax Review Board, and finally Chief Judge of the Tax Court of Canada, on this subject. The point at issue here is not very materially different than that dealt with in Heinze (supra) even though much has obviously been written and said about it since that time. The issue is not without controversy and I quote certain passages particularly relied on by this Appellant from Bulletin I.T. 364 - Commencement of Business, provided by Revenue Canada to assist in such determinations:

In order that there be a finding that a business has commenced, it is necessary that there be a fairly specific concept of the type of activity to be carried on and a sufficient organizational structure assembled to undertake at least the essential preliminaries.

Even prior to that, the business would be viewed as having started if market surveys were undertaken on a reasonably extensive basis for the purpose of establishing the most appropriate way or place to carry on the business. Any positive and continuous steps taken to introduce a particular product to an intended market are activities of an operating nature even though they precede the creation of the sales organization of the business. If the proposed business was the operation of a hotel, the date when the business commenced would not be the day when it opened its doors to guests but normally would be such earlier time when construction of the hotel was under way and arrangements were being made for supplies, employee training, advertising, and other preliminary requirements of an operating hotel.

It was held by the courts that this corporation commenced business when these preliminary studies and negotiations were undertaken even though, in the end, the project was abandoned. The fact that no revenue was generated during this period was held not to be a significant consideration in determining whether the business had commenced and was being carried on.

I would add the following from the same bulletin:

Expenses in respect of a proposed business that are incurred prior to the commencement of the business do not constitute a business loss or a non-capital loss and thus cannot be applied against income in the year the expenses were incurred, and cannot be carried back to be applied against income of the preceding year or forward to be applied against income of any subsequent year. If capital assets are acquired for a business before the business commenced, are later used in the business and are not used for some other purpose in the meantime, the capital cost of the assets is the amount that it would have been had the business been operating when the assets were acquired. If the business for which the capital assets were acquired never commences, the normal rules in the Act regarding capital gains and capital losses would apply if and when the assets were subsequently disposed of. (underlining mine)

To say that Bulletin LT. 364 is more confusing and contradictory than it is compelling and convincing would be an understatement. Certainly, its very existence and availability has caused this taxpayer considerable concern, as well as the time and resources spent on this matter. In my view, it provides no real guidance for a determination such as this, but rather tends to generate the range of views evident in the case law cited above, both pro and con.

First I have great difficulty to understand how any undertaking which has not yet commenced operation at all can be classified as a business - merely by terming it so, and setting some uncertain and ill-defined words around it thereby avoiding the onus of dealing with the major impediment - “reasonable expectation of profit” as a necessary ingredient in “business”. I have already noted in Heenan v. R. (1995), 96 D.T.C. 1344 (T.C.C.) , at page 1367, the following:

... The use of other wording such as - “business purpose”, “commercially motivated operation”, “money spent in good faith”, “overall economic impact”, “well accepted principles of business practice” etc., to be found in some publications and even in some case law, does not have the result sought by Counsel for the Appellants, of negating the value of the standard phrase “reasonable expectation of profit”. Those additional phrases are enlightening and informative, and I understand their utilization, but not their distortion, or misinterpretation.

Reference should also be made to a quotation in Heenan (supra) from the Chief Judge of this Court enlarging on that point when he wrote in Zolis v. Minister of National Revenue (1987), 87 D.T.C. 183 (T.C.C.) :

The aspirations or ambitions that a taxpayer may have entertained in respect of activity in which he was engaged are not alone sufficient to bring it within the strict meaning of business in the relevant legislation no matter how genuine they might have been. What must be examined apart from the structural features of the undertaking is the manner in which it is carried on or operated by the taxpayer and from the interplay of these element’s determination made whether it is capable of yielding a profit in due course. The Court has to deal with concrete facts and from those facts alone assess the validity of the contention of the existence of a business for the purpose of the Act.

(Emphasis mine)

Even to any extent that Bulletin LT. 364 may be of service to taxpayer - it leaves clouded the distinction which should be made between the establishment or development of an “organizational structure” which could form a “source of income”, and a “source of income” itself. To whatever degree, clarification of this point needed to be made, I find it in the recent judgment of the Federal Court of Appeal - Mastri v. R. (June 27, 1997), Doc. A-650- 96, A-651-96 (Fed. C.A.):

It is simply unreasonable to posit that the Court intended to establish a rule of law to the effect that, even though there was no reasonable expectation of profit, losses are deductible from other income sources unless, for example, the income earning activity involved a personal element.

Also while dealing specifically with the rules which should be applied in any application of Section 67 of the Act the same Court commented in Mohammad v. R. (July 28, 1997), Doc. A-652-96 (Fed. C.A.):

...Of course, this line of reasoning is unacceptable for it renders moot the question of whether the taxpayer had a reasonable expectation of profit.

...Granted, the nature of section 67 is more subtle than that of the reasonable expectation doctrine which is inherently an “all or nothing” test: either one does or does not have the requisite expectation; there is no middle ground.

In my view these sage observations are of equal merit when applied to this situation. In the case of Bancroft (supra) the learned Judge took the view that there was no requirement to look at a second step - “reasonable expectation of profit”, but in Fearn (supra) the dismissal was based on the lack of such a “reasonable expectation of profit” not being evident from the facts established. I lean to the view expressed in Fearn (supra) since I find little merit in the postulates described in Bulletin I.T. 364. Also, I would regard the need to establish a “source of income” - Firestone (supra) as somewhat more basic than a narrow technicality in this particular appeal, I would certainly concur with the comment in Goren (supra) that at least the commencement of the process of operating a profit making entity should be a pre-condition to deductibility. I merely point out that as the case law shows, the circumstances under which that “profit making entity” is evident are rare indeed, without the structure actually operating and performing. The comment from Urbandale (supra) regarding the value of Bulletin I.T. 364 I adopt and echo.

The primary position which appeals to me after this review is that a business does not commence until it is an operating entity capable of showing that a profit is at least possible. A reasonable expectation of profit (certainly a level higher than “capable” above) can hardly be demonstrated based on merely the existence of an embryonic structure intended for operation but which has not been put to the acid test of earning income, let alone profit. Whether a structure - fully capable of being put to economic use (in effect virtually “up and running”) but prior to adequate hard assessment for whatever reason, should warrant a different view I need not examine - but the difficulty of so showing is obvious. I do not have that situation in the circumstances of this case.

As to the much vaunted “start-up” costs which were also referenced in this appeal, I have made my views known in Sardinha v. R. (T.C.C.), File No. 96-860(IT)I, dated November 29, 1996 [now reported (1996), [1997] 2 C.T.C. 2049 (T.C.C.)]:

...While I need not rule on that point specifically in this appeal, I do point out that it seems to be a contradiction in terms to assert “start-up costs” for a business where no reasonable expectation of profit can be demonstrated. The obvious question is what are you starting? If not a business, then why should “startup costs” be deductible? These expenses termed euphemistically “start-up costs” might be the result of some experiment, some hope, or some speculation from which a business could arise, but that leaves considerable doubt about any claim for deductibility from other income, on a current basis.

In the end analyses it is unnecessary for me to rule on whether the claim should be regarded as either “personal” or “capital”, but I would think a combination of the two. Even under the most optimistic view which could be taken of these circumstances - using Bulletin I.T. 364 and the positive case law - this situation does not qualify as a business and the expenditures are not deductible. That result may leave risk-takers and entrepreneurs somewhat at a difficult point under the Act when plans and developments are frustrated or implode, even wither to nothing sometimes after considerable expenditure. I recognize that. However, that inadequacy, perhaps even inequity, could be addressed in legislative format to avoid discouraging taxpayers’ efforts in this direction. I do not find the relief sought by this taxpayer under the limitations presently prescribed.

The appeal is dismissed.

Appeal dismissed.